CSX Corp. Chief Executive Hunter Harrison.

Harrison surprised by CSX stock dip

Company’s earnings beat estimates, but bottom line was boosted by several one-time items.
By: 
Jul. 24, 2017

After reporting earnings on Tuesday that were higher than analysts predicted, CSX Corp. Chief Executive Hunter Harrison was surprised to see a sharp drop in the stock on Wednesday.

“I hope we were reading the same one,” Harrison said in the company’s conference call with analysts Wednesday, referring to the news release.

“I thought we had a hell of a quarter. Four months, we’ve been after this and a lot has been done, a lot has been accomplished,” said Harrison, who came in as CEO in March.

Jacksonville-based CSX’s adjusted earnings of 64 cents a share for the second quarter beat analysts’ forecasts, which ranged from 53 cents to 62 cents, according to Yahoo Finance.

However, once analysts dug in to the report, they found several one-time items contributed to the earnings beat, including a $55 million gain from a judgment related to a condemned property and a $58 million settlement with a customer that did not meet its volume commitments.

CSX’s stock dropped $2.77 to $51.87 Wednesday after the earnings report.

“I’m very pleased with the direction the organization has taken although, I think, maybe, certainly in some quarters, and I understand that, your expectations were pretty high,” Harrison said in the same rambling manner that has marked his first two conference calls.

Several analysts agreed that investors overreacted to expectations of what Harrison will do to improve operations at CSX.

“The stock’s 5 percent-plus dip was more reflective of sky-high expectations and surprise around positive ‘onetime’ items embedded in management’s unchanged guidance,” Deutsche Bank analyst Amit Mehrotra said in a research note.

“While the latter is a valid critique of management communication, our mid and long-term expectations around earnings and cash flow remain unchanged,” he said.

Mehrotra and other analysts saw the stock’s drop as a buying opportunity.

“It is hard to deny that CSX’s second-quarter results came in below elevated expectations after adjusting for favorable items. Nonetheless, margin expansion is evident and we expect momentum in cost reduction as the company progresses toward a ‘precision railroad’ model, driving significant long-term value from current levels,” said a note by Barclays analyst Brandon Oglenski.

“Yes, CSX’s turnaround pace gained some ‘show me’ skepticism today, but nothing we heard suggests the multi-year opportunity is any less intact than it was 24 hours ago,” said Susquehanna Financial Group analyst Bascome Majors in his note.

Majors described the over-two-hour conference call as “inconsistent,” which likely explains some of the confusion surrounding Harrison’s statements in the call.

Some news reports last week said Harrison announced 700 more layoffs coming from CSX. But he didn’t actually do that, and The Associated Press and others reported CSX already has laid off 2,300 people this year, which also is inaccurate.

CSX’s report showed total employment in June was 2,300 below its June 2016 level, which would include jobs lost well before Harrison came in. That includes 951 management-level jobs and wide-ranging cuts throughout its Eastern U.S. rail network, which have been ongoing.

Reports filed with the U.S. Surface Transportation Board show CSX has lowered employment by about 1,400 in 2017, also including cuts made before Harrison came in.

Responding to an analyst’s question during the conference call, Harrison referred to the 2,300 figure and said, “I wouldn’t be surprised if before the year’s out, if a lot things come together, that could be 3,000.”

Later in the call, Chief Financial Officer Frank Lonegro said the continuing job cuts include a “combination of management, union and contractors,” but he added the company is not ready to give data on contractors.

Harrison did promise to take one step to bring more clarity to the company’s financial reports. 

CSX traditionally has released its earnings reports late in the afternoon after the markets have closed, and held its conference calls with analysts the next morning. 

Harrison said going forward, CSX will instead hold its conference call “simultaneously” with the release of the quarterly report.

“I think it’ll put us in a situation where you’re not having to make observations in the dark and it’ll make our work here much easier in distributing this information to the shareholder, which is really the important thing we’re dealing with here,” he said.

Web.com stock sinks on market rumors

Web.com Group Inc.’s stock dropped $2.10 to $22.85 Thursday on market rumors that the company was no longer in talks about a possible buyout. The stock had reached a 52-week high of $25.95 a week before that.

Reuters news service reported in May that private equity firms had come to Jacksonville-based Web.com to talk about possible deals, but the company was not itself soliciting offers.

Web.com never publicly commented on that report.

Rayonier increases price for Tembec

Rayonier Advanced Materials Inc. Sunday night announced an increase in the price of its merger agreement with Tembec Inc., to get the support of two large shareholders.

Oaktree Capital Management, which holds 19.9 percent of Tembec’s stock, and Restructuring Capital Associates, which holds 17.1 percent, both said they would vote against the buyout because the price was too low.

So, Jacksonville-based Rayonier AM will now pay either $4.75 in cash or 0.2542 shares of its stock for each share of Montreal-based Tembec.

The previous agreement called for Rayonier AM to pay either $4.05 in cash or issue 0.2302 shares of stock.

Rayonier AM said both Oaktree and Restructuring Capital agreed to vote in favor of the deal at the higher price.
Tembec shareholders are scheduled to vote on the deal at a special meeting Thursday in Montreal. 

Foley juggling several roles

As Fidelity National Financial Inc. (FNF) works to complete its spinoffs of investment unit Fidelity National Financial Ventures (FNFV) and Black Knight Financial Services Inc., it seems that Bill Foley is doing some juggling.

But responding to an analyst’s question during FNFV’s conference call last week, Foley said he’s got everything under control.

Foley is chairman of title insurance company FNF and FNFV, and executive chairman of mortgage technology company Black Knight.

He also is running an investment company called CF Corp. and, of course, he is the owner of a National Hockey League expansion franchise in Las Vegas that begins play in the fall.

“FNFV is now headquartered in Las Vegas, which is where I spend a good piece of my time, and I’m pretty active in FNFV,” Foley said.

At Jacksonville-based FNF, “I’m involved but the business is run by Randy (Quirk, CEO) Mike (Nolan, president) and Tony (Park, CFO),” he said.

“I’m still involved with Black Knight, but it’s become more of a maintenance situation.”

Foley retired as vice chairman of Jacksonville-based Fidelity National Information Services Inc. (FIS) earlier this year. “So that’s freed up a little bit of time.  I’m looking at some other situations that I’m involved in to remove myself from those particular boards or companies,” he said.

“I am spending a lot of time on hockey, though. It’s very important. We need to win that Stanley Cup.”

FNF, Black Knight earnings up

FNF reported adjusted earnings of 75 cents a share for the second quarter, a penny higher than last year and at the high end of analysts’ forecasts, which ranged from 70 cents to 75 cents, according to Yahoo.

FNF is spinning off FNFV into a new, separate public company called Cannae Holdings Inc. It also owns a majority stake in Jacksonville-based Black Knight, but is distributing those shares to FNF stockholders. Those spinoffs are expected to be completed by the end of the third quarter.

Black Knight last week reported second-quarter adjusted earnings of 35 cents a share, 6 cents higher than last year and 2 cents higher than the average analysts’ forecast.

Black Knight also last week said in a Securities and Exchange Commission filing that Joseph Nackashi was promoted to president of the company. He had been president of the company’s servicing technologies division.

Thomas Sanzone continues to serve as chief executive officer but gave up the additional title of president.

Johnson & Johnson contact lens sales up

Johnson & Johnson’s Jacksonville-based vision care subsidiary grew substantially in the second quarter, helped by a major acquisition at the end of February. But the division’s legacy contact lens business also grew sales.

As the New Jersey-based medical products giant reported second-quarter results, it said Johnson & Johnson Vision Care’s revenue reached $1.055 billion in the quarter, the first full quarter after its $4.3 billion acquisition of Abbott Medical Optics.

The vision care unit had been basically a contact lens company, but the Abbott deal added ophthalmic products for cataract surgery, laser refractive surgery and consumer eye health to the division.

Johnson & Johnson did not give specific sales figures for contact lenses but during the company’s conference call, Vice President of Investor Relations Joseph Wolk said global contact lens sales rose by about 7 percent in the quarter.

mbasch@jaxdailyrecord.com