Morgan Stanley downgrades CSX, Landstar on freight outlook


  • By Mark Basch
  • | 12:00 p.m. February 29, 2016
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The outlook for freight transportation is bleak over the coming months, and that is impacting a couple of significant Jacksonville-based companies, CSX Corp. and Landstar System Inc.

Analysts at Morgan Stanley last week downgraded their ratings on both companies, as part of an overall look at the state of the freight transportation market.

The analysts said in their report the outlook for railroads is “unfavorable” and rated CSX at the bottom of their rankings of rail stocks.

Their concerns go beyond freight demand in the coming months.

“Rather than near-term expectations, we are more concerned about the medium-long term outlook at the rails. Simply put, we do not know where the growth is going to come from through the end of the decade and beyond,” they said.

CSX actually started last week on a high note, with a triple dose of good news Monday. Bank of America/Merrill Lynch analysts upgraded their rating on the stock from “neutral” to “buy” and CNBC commentator Jim Cramer touted the stock on his “Squawk on the Street” show.

Cramer said he thought CSX’s stock had bottomed out, so he would buy it.

Monday also was the day CSX was added to the Nasdaq-100 stock index, and stocks generally benefit from joining major indexes because managers of funds tied to the indexes have to buy the stock to keep the funds consistent.

That all sent CSX’s stock up as much as $1.20 Monday to $25.71, its highest level since the first week of January.

However, the stock dropped back to $24.38 at Tuesday’s close after Morgan Stanley analyst Ravi Shanker downgraded CSX from “overweight” to “underweight.”

Shanker said in the firm’s report that CSX’s operating metrics “rank toward the bottom” of railroad stocks and the company has “higher than average exposure to the four most challenged end markets of coal, energy, auto and intermodal.”

He did say, “CSX management has done a decent job of responding to the environment, especially structural coal weakness, by taking steps to cut costs that go beyond some peers. Given continued end-market pressure as well as peer pressure, we believe management could take bigger steps.”

Landstar also ranked low by analysts

Morgan Stanley analysts also rated Landstar near the bottom of its ranking of trucking stocks.

Analyst Alex Vecchio downgraded Landstar from “equal weight” to “underweight,” saying he sees “limited potential for company-specific actions to stimulate growth in a lackluster freight backdrop.”

Vecchio said in his report that Landstar will be impacted by the loss of an automobile shipping contract and from more exposure to industrial markets with its flatbed trucks.

“The prospect for domestic industrial/energy end markets to remain soft in 2016 bodes poorly for demand for flatbed transportation services and therefore Landstar’s overall top-line prospects in 2016,” he said.

Like the rail industry, the Morgan Stanley analysts see near-term challenges for trucks but seem to have a more optimistic view of the industry’s long term.

“The secular headwinds facing trucking are very real but we believe the industry now has the tools to respond. We believe the introduction of intelligent trucks and other new technologies can help solve or at least offset secular headwinds. With widespread adoption, these new technologies can help revolutionize the trucking industry over time,” they said.

Stifel analysts also concerned about freight

Morgan Stanley analysts aren’t the only ones expressing concern about the freight environment.

After hosting a transportation and logistics conference in Key Biscayne, analysts at Stifel issued a report stating “freight still stinks for most carriers.”

Another concern is a “regulatory tidal wave,” they said.

“Many business-inhibiting safety-related, fuel-efficiency-related and air quality rules and regulations (many to likely result in unintended consequences) could be passed over the next 11 months or so.”

However, the Stifel analysts do see light at the end of the tunnel.

“Provided we avoid a full-blown recession, we may be close to the end of the worst of the downdraft that has plagued transportation and logistics stocks in 2015 and early 2016,” they said.

“At times like these, we suggest investors gravitate towards the higher quality names which tend to be less volatile, more defensive, and the first to recover.”

The analysts said one of those quality names is CSX, which they rate as a “buy.” They also rate Landstar at “buy.”

PHH posts 2015 loss

PHH Corp. last week reported a loss for 2015 and said its move to a smaller office in Jacksonville is part of a multifaceted plan to cut costs.

The New Jersey-based mortgage company reported a “core” loss of $152 million, or $2.74 a share, for the year.

PHH said in November it would move its Jacksonville mortgage operations center out of the PHH Mortgage building at 5201 Gate Parkway to a smaller office at 8800 Baymeadows Way W., because of unutilized space in its building as the company downsized.

PHH had 450 employees in the office in November, down from more than 1,000 three years ago.

During the company’s conference call with analysts Thursday, CEO Glen Messina outlined a number of cost-cutting steps for the company and said the relocation of the Jacksonville office is one of the few remaining actions to finish from that plan.

He said the relocation should be complete by the end of the first quarter.

Messina said PHH is cutting $225 million in annual expenses, which should help the company return to profitability.

“Assuming we achieve our costs, volume and other business objectives and interest rates and the market unfolds as forecasted, we continue to expect core earnings before notable items to be break even to modestly profitable for 2016,” he said.

Analysts had been projecting a profit for 2016, so that forecast may have been a disappointment for investors, who sent the already faltering stock to record lows after the report.

PHH closed Thursday at $8.83, down $3.06 on the day.

Home Depot integrating Interline

The fourth quarter was the first full quarter for The Home Depot Inc. since it acquired Jacksonville-based Interline Brands Inc.

While the home improvement retailer is not giving out financial information on its Interline subsidiary, officials did discuss the company’s progress with the Interline business in their quarterly conference call with analysts last week.

“We’re obviously in the early days of the integration efforts,” said CEO Craig Minear, according to a transcript of the conference call posted on Home Depot’s website.

“We reduced redundancy in the business and now we are really getting into more of the focus on the sales side of it and sales-driving initiatives,” he said.

Minear said the sales initiatives include offering Home Depot’s paint brands to customers of Interline, which serves maintenance, repair and operations professionals.

Executive Vice President Bill Lennie said Home Depot is working on more cross-selling opportunities with Interline customers.

“We have seen some wins and some additional account engagements. So what that does, it really validates what we see as the value of the Interline acquisition,” Lennie said.

“We’re working on that vision of one Home Depot that allows our customers to shop either in-store, online or through Interline and having a greater access to a broader range of goods,” he said.

Safariland expands with acquisitions

Jacksonville-based Safariland Group last week said it acquired the assets of United Uniform Co. Inc., a Buffalo, N.Y., company that sells equipment and uniforms for law enforcement and public safety professionals.

Terms of the deal were not announced.

United Uniform has three retail stores in New York state and also sells products through a website.

Safariland, which manufactures law enforcement equipment, said the deal expands its geographic footprint to 11 retail stores in the Eastern U.S.

Stein Mart details store locations

Stein Mart Inc. last week announced more details of its store growth plans for 2016.

The Jacksonville-based fashion retailer previously announced it would open at least 12 stores this year, including five this spring.

Last week, it announced the locations of the five stores that will open next month, which include its first store in Delaware and its second store in Naples.

Stein Mart said it will announce details in the summer of at least seven new stores to open in October and November.

Stein Mart has 278 stores across the country.

Convergys Corp. beats forecasts

Convergys Corp.’s stock rose Wednesday after the outsourced customer service company reported higher-than-expected earnings.

Adjusted fourth-quarter earnings of 53 cents a share were only a penny higher than the previous year, but were 6 cents higher than the average forecast of analysts, according to Thomson Financial.

Convergys forecasts 2016 earnings will grow by 5 percent to 8 percent from 2015 earnings of $1.76 a share, in line with analysts’ average forecast of $1.88.

The company’s stock rose $1.63 to $26.05 Wednesday after the earnings report.

Cincinnati-based Convergys operates customer service centers in more than 150 locations, including a major center in Jacksonville.

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