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Jax Daily Record Monday, Jul. 22, 201312:00 PM EST

Without a coal turnaround, analysts look for CSX 'game changer'

by: Mark Basch Contributing Writer

As CSX Corp. goes through something of a transition, learning to rely less on coal shipments to build profits, analysts still are fixated on how the coal markets will impact the Jacksonville-based railroad's earnings.

CSX has been dealing with lower demand for coal shipments, its biggest business, for the past two years.

After reporting its second-quarter earnings last week, CSX officials were touting increases in other business segments to make up for some of that lost revenue, such as intermodal and crude oil shipments.

However, analysts still say coal is king.

"While CSX expects to experience 'stable or favorable' growth in 83 percent of its book of business, overall volumes are expected to be constrained by ongoing coal headwinds next quarter," Deutsche Bank analyst Justin Yagerman said in a research note.

CSX is projecting earnings to be flat this year, compared with 2012, but it is projecting earnings per share growth of 10 percent to 15 percent a year beginning in 2014.

Wells Fargo analyst Anthony Gallo thinks CSX can achieve that growth.

"Our premise is that pricing and productivity gains will modestly outpace expense inflation, and that network volume growth (ex-coal) can be in the low-single-digit range," Gallo said in his report on second-quarter results.

"However, we think earnings growth above these targets will be difficult in the absence of legacy contract repricing and/or 'game-changing' volume acceleration," he said.

He doesn't think CSX's efforts to build up its other businesses will qualify.

"We think crude-on-rail, for example, is a nice addition but not a 'game changer' and not large enough to offset energy weakness elsewhere," he said. Intermodal business "should outpace economic growth" but also won't be a difference-maker, he said.

On the bright side, Gallo doesn't see much of a downside risk to CSX's stock and while he maintains a "market perform" rating, he increased his valuation on the stock from $24 to $26 before last week's earnings report to $26 to $27.

Yagerman also has a "hold" rating (the equivalent of market perform) with a $25 price target, which is about where CSX was trading after the earnings report. He noted that the stock already has had a nice runup this year.

"Shares of CSX are up 23.4 percent year-to-date, outpacing the S&P 500 (up 18 percent over the same period) as investors have bid up shares following 2012 underperformance," he said.

However, John Larkin of Stifel, Nicolaus maintained a "buy" rating and raised his price target from $28 to $29 after the earnings report.

"Our 4 percent increase in target multiple is justified, in our view, given the conservatism built into our model, management's modest positive revision in 2013 EPS guidance, and the passage of time," Larkin said in his research note.

CSX had been forecasting flat to slightly lower 2013 earnings after the first quarter, but last week it revised the forecast to just plain flat.

According to Thomson Financial, 15 analysts following CSX rate it the equivalent of "buy" and 14 rate it as a "hold."

Dick's Wings operator's CEO resigns

Jacksonville-based American Restaurant Concepts Inc., the franchisor of the Dick's Wings restaurant chain, said in a Securities and Exchange Commission filing Thursday that CEO Michael Rosenberger agreed to resign.

Rosenberger also will resign from the company's board of directors, effective July 31, but he has a consulting agreement with the company that runs through Dec. 31.

The filing did not name a successor as CEO.

Rosenberger sold 41.7 percent of American Restaurant Concept's stock last year to investor William Leopold. Another investor working with Leopold, Seenu Kasturi, acquired 6.9 percent of the stock earlier this year. Rosenberger retained 12.3 percent, according to the company's annual report.

Two companies with local ties plan IPOs

Two companies that operate properties in Jacksonville filed plans over the past week for initial public offerings.

Dallas-based ClubCorp Holdings Inc. operates private golf, country, business, sports and alumni clubs. Its operations include two Jacksonville golf and country clubs — Deercreek Country Club and Queen's Harbour Yacht & Country Club — and one local business club, The University Club in the Riverplace Tower on Jacksonville's Southbank.

The other company filing for an IPO was New York-based Brixmor Property Group Inc., which operates neighborhood shopping centers. Its portfolio of 522 shopping centers includes five in Northeast Florida.

ClubCorp operates a total of 102 golf and country clubs and 48 business, sports and alumni clubs in 23 states and two foreign countries. Its SEC filing says it is the nation's largest owner of private golf and country clubs.

The filing does not give details on the individual clubs but says the company owns the underlying real estate for 80 of its golf and country clubs and leases or manages the others. According to Duval County records, it does own the Deercreek property but not Queen's Harbour.

ClubCorp's IPO filing also said it only owns one of its business clubs.

The company was acquired by private equity firm KSL in 2006 and after the IPO, KSL will continue to control a majority of ClubCorp's stock.

ClubCorp reported revenue of $535.3 million and a net loss of $27.3 million in 2012. Like many businesses owned by private equity firms, it recorded an operating profit, but high interest expenses resulted in a final net loss.

Brixmor appears to be a competitor of Jacksonville-based Regency Centers Corp., which specializes in grocery-anchored shopping centers. Brixmor's SEC filing says that 70 percent of its centers are anchored by "market-leading grocers."

The company was acquired by well-known private equity firm Blackstone Group in 2011, which will continue to control a majority of the stock after the IPO.

Brixmor's Jacksonville area properties include:

• The Shoppes at Southside, anchored by Best Buy, David's Bridal and Sports Authority. Its 109,113 square feet of space is fully leased, according to the SEC filing.

• Normandy Square, anchored by CVS, Family Dollar and Winn-Dixie. Its 87,240 square feet of space is 95.6 percent leased.

• Regency Park, anchored by American Signature Furniture and Hobby Lobby. Its 334,065 square feet is just 68.3 percent leased.

Brixmor also owns the 36,029-square-foot Fashion Square in Orange Park, anchored by Miller's Ale House and Ruby Tuesday restaurants. The center is only 32.6 percent leased.

The fifth Northeast Florida property is the 261,081-square-foot Cobblestone Village in St. Augustine. The center, with anchors including Publix and Bealls, is 95.9 percent leased.

Brixmor reported total revenue of $1.1 billion last year and a net loss of $160.7 million, due (like ClubCorp) to high interest expenses.

Home rental company planning IPO

Another company in the IPO pipeline is American Homes 4 Rent, which was formed in November "to take advantage of the dislocation in the single-family home market," according to its SEC filings.

The company originally filed plans for its IPO in June and in an updated filing last week, it said it owned 17,949 single-family properties in 21 states as of June 30, representing an investment of $3.1 billion.

Jacksonville is the company's eighth-largest market with 829 properties valued at $123.6 million as of June 30.

American Homes 4 Rent is looking for more properties in Jacksonville, according to a report on the market in its SEC filings.

"We believe that there remains opportunity in the Jacksonville market to continue to acquire, restore, lease and manage single-family homes," it said.

American Homes 4 Rent reported revenue of $6.6 million and a net loss of $7.8 million in the first quarter this year.

Synovus redeeming TARP shares

Remember TARP, the federal government program created in 2008 to help banks through the financial crisis?

You may have thought that was in the past, but Synovus Financial Corp. last week announced a plan to finally redeem the shares of preferred stock issued to the U.S. Department of the Treasury under the Troubled Asset Relief Program.

The government invested $245 billion in banks under TARP and has received a positive return, with $271 billion repaid to the Treasury as of June 30.

However, several banks still have preferred shares outstanding and according to Treasury Department data, Synovus is the largest with $967.9 million outstanding.

Synovus on Friday priced an offering of common stock that will raise about $175 million. The company said it will use that money, along with proceeds of another $130 million preferred stock offering and a $680 million dividend from its subsidiary bank, to redeem the shares owned by the Treasury.

Columbus, Ga.-based Synovus, which has six branches in the Jacksonville area, is profitable. Last week it reported second-quarter earnings of $45.5 million, or 3 cents per common share.

Currency rates affect Vistakon sales

Johnson & Johnson last week reported flat second-quarter sales for its Jacksonville-based contact lens subsidiary, Vistakon, as currency rates had a negative impact on its international sales.

Vistakon's second-quarter sales were $730 million, the same as the second quarter of 2012. However, on an operational basis — excluding the currency impact — sales rose by 5.4 percent.

Overall, Johnson & Johnson said its sales rose 8.5 percent to $17.9 billion but the sales gain would have been 10 percent without the currency impact.

The New Jersey-based medical products giant said its adjusted earnings in the quarter rose 18 percent to $4.3 billion, or $1.48 a share. That beat the average forecast of analysts by 9 cents a share, according to Thomson Financial.

Johnson & Johnson's stock rose as much as $1.22 to a record high of $91.66 Tuesday after the earnings report.

Washington Post buying industrial business

Over the years, I have often talked about the seemingly strange investments made by Jacksonville-based Fidelity National Financial Inc. into companies that have nothing to do with its main business, title insurance. Its ownership of several restaurant chains would be one example.

Apparently, The Washington Post Co. has a similar strategy of investing excess cash into unrelated business. Washington Post is, of course, known mainly for journalism, with its newspaper and stable of television stations, including WJXT TV-4 in Jacksonville.

Last week, Washington Post announced an agreement to buy Forney Corp., which it described in a news release as "a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications."

In the release, CEO Donald Graham said the deal is part of the company's "ongoing strategy of investing in companies with demonstrated earnings potential and strong management teams attracted to our long-term investment horizon. Forney is a small acquisition that fits with our decentralized operating philosophy."

Washington Post for years has owned educational services company Kaplan. The company also owns Celtic Healthcare, which it describes as "a multistate provider of Medicare-certified home healthcare and hospice services."

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