Another earnings season kicks off this week, with both CSX Corp. and Fidelity National Information Services Inc. scheduled to report their second-quarter results Tuesday.
CSX is usually the first Jacksonville company to report earnings every quarter and also the first of the major railroads, so its results are scrutinized as a bellwether of the overall economy.
CSX’s reports break down the volume of freight delivered through its system into several economic categories, such as automobiles and housing materials, so we can use it to gauge economic activity in those sectors.
While it may not help us assess the U.S. economy, much of the attention on this week’s report will focus on coal shipments because it is by far the biggest part of the company’s business, accounting for more than 30 percent of revenue.
Concern over lower coal volumes this year has been a drag on CSX’s stock price, and one more issue emerged last week when one of its biggest customers, Patriot Coal, filed for Chapter 11 bankruptcy.
Patriot Coal’s bankruptcy petition listed CSX as its sixth-largest creditor, which raised immediate questions about how Patriot’s problems would impact CSX’s results.
Wolfe Trahan analyst Ed Wolfe estimated that Patriot Coal accounts for 7 percent of CSX’s total coal volume, but he and other analysts are not concerned about the impact.
“We spoke with CSX, and management does not believe Patriot’s bankruptcy is much of an event in their opinion,” Wolfe said in his report.
In a research note last Monday after Patriot Coal’s filing, Jefferies analyst Peter Nesvold said that CSX is used to dealing with customers going into bankruptcy.
“Having served auto and steel companies that have moved into and out of bankruptcy over the past few decades, CSX has dealt with this type of issue before. Based on initial disclosure, we believe that the Patriot bankruptcy will not have a material impact on CSX’s financial performance,” Nesvold said.
Both Nesvold and Wolfe said that CSX would likely be given “critical vendor” status in Patriot Coal’s bankruptcy, meaning CSX is likely to be paid in full by Patriot.
“If not paid, CSX (as a critical vendor) could take possession of any contracted (and unpaid) coal and resell the product. We believe CSX could take possession of the coal relatively quickly,” Nesvold said.
At worst, if CSX has to write off the money owned by Patriot Coal, he thinks that will cost less than a penny per share for the company.
As investors digested the Patriot Coal news last week, Goldman Sachs analysts initiated coverage of CSX with a “buy” rating, saying they expect coal volumes to stabilize in the near future.
“With the bottom in domestic utility coal very close, we see limited downside in the name and believe the shares can work higher as investors shift focus to non-coal segments which are performing well year to date,” the analysts said.
“We believe CSX can post 10 percent EPS growth in 2012 despite the coal headwind,” they said.
Fidelity earnings a bellwether for banks
Fidelity National Information’s report Tuesday also will be a bellwether, at least for the banking industry, D.A. Davidson analyst John Kraft said in a research note last week.
“As the first financial technology vendor to report earnings, within our coverage universe, we will be listening for commentary regarding changes in financial institution spending appetites,” Kraft said.
“We expect continued cautious optimism. While modest, discretionary spending does appear to be improving. Banks have largely strengthened their balance sheets and started to once again focus on growth,” he said.
Fidelity, which calls itself FIS, announced an agreement last month to sell off its health care benefits solutions business. Analysts probably will be looking for more insight into that deal, which the company already said will dilute earnings.
Kraft said he is reducing his revenue forecast for this year by $125 million and earnings from continuing operations by 7 cents a share because of the deal, but he said the sale makes sense.
“The divestiture is in line with the company’s core focus on financial institution services and is not surprising, given the increasing focus on cross selling and ‘suite’ selling,” he said.
Even though FIS has already said the deal will lower earnings, Robert W. Baird analyst David Koning said in a research note Friday that investors may react negatively Tuesday after FIS gives its outlook for the rest of the year.
“We acknowledge that these are well-known impacts, but we still believe that it could cause mild choppiness” in the stock price, he said.
Koning said he was downgrading the stock to “neutral” after a strong run pushed it to a recent high of $34.85.
“With the stock around a four-year relative high and U.S industry growth appearing to stabilize around three to four percent, we view risk/reward as balanced,” he said.
Interline reports improved second quarter
Interline Brands Inc. last week reported some preliminary results for the second quarter in a Securities and Exchange Commission filing, as it moves toward completing a buyout by two private equity firms.
The Jacksonville-based distributor of maintenance, repair and operations products expects to report sales of $334 million to $335 million, up from $317.7 million in the second quarter of 2011.
Interline also said its adjusted earnings before interest, taxes, depreciation and amortization “generally met or modestly exceeded” last year’s results.
Interline also reported new details on how the proposed buyout by P2 Capital Partners LLC and an affiliate of Goldman Sachs will affect its finances.
In the 12 months ended March 31, Interline recorded net income of $38.3 million. But if the results are adjusted for expenses related to the buyout (mainly additional interest charges), Interline’s earnings would have been reduced to $8.8 million in that 12-month period.
Standard & Poor’s Ratings Services last week assigned Interline a B-plus corporate credit rating and said it is keeping Interline on its CreditWatch list with negative implications. S&P put Interline on the list after the deal was announced in May.
“The rating on Interline Brands Inc. reflects Interline’s weaker credit metrics following the increase in debt to support the acquisition,” S&P credit analyst Megan Johnston said in a news release.
Moody’s Investors Service last month downgraded Interline’s corporate family rating from B-1 to B-2 because of the increased debt.
Interline is expecting the buyout to be completed during the third quarter.
St. Joe off the hook on Southwest
The St. Joe Co. bet a good part of its future on the development of a new airport that opened two years ago in Panama City. The airport was built on land formerly owned by St. Joe, which was then headquartered in Jacksonville, and the company was hoping the airport would open up new development opportunities for other land surrounding the facility that is still owned by St. Joe.
To ensure success of the airport, St. Joe helped recruit Southwest Airlines to provide service there by guaranteeing to reimburse the airline for up to $26 million in losses during its first three years of operations in Panama City.
It’s only been two years but St. Joe, which is now headquartered in the Panhandle, is off the hook. St. Joe announced that it mutually agreed with Southwest to end that contract July 1. St. Joe never had to make any payments on that guarantee since the airport opened in May 2010.
“We are proud to have played a critical role in securing air service by Southwest to Northwest Florida Beaches International Airport,” St. Joe CEO Park Brady said in a news release.
“The financial safety net provided by St. Joe was instrumental in attracting Southwest Airlines to Northwest Florida Beaches International. In every respect, the agreement with St. Joe has been a triumph. It has fulfilled its mission and achieved its intended purpose,” said Bob Montgomery, vice president of airport affairs for Southwest, in the release.
Southwest recently extended its lease at the airport through 2015.
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