CSX Corp. reported lower first-quarter earnings and a drop in revenue that was even bigger than analysts were expecting, but investors were pleased overall with the Jacksonville-based railroad company’s report.
CSX’s stock rose $1.04 to $26.03 Wednesday after the earnings report.
Analysts said they were encouraged by CSX’s efforts to manage the business in the face of lower freight volumes, particularly a sharp drop in coal shipments.
“The conference call reaffirmed that management is focused on using efficiency gains to help offset continued volume headwinds,” RBC Capital Markets analyst John Barnes said in a research note.
The company said it expects efficiency gains, or cost cuts, of about $250 million this year, up from previous expectations of $200 million.
“The stock reacted positively to earnings largely due to CSX’s commitment to reducing headcount further and achieving $50 million more in additional savings this year,” Cowen and Co. analyst Jason Seidl said in his research note.
CSX has cut jobs in the past year and while investors may interpret the additional efficiencies to mean additional job cuts, company officials said last week they expect the headcount to remain stable in the second quarter.
“The bulk of the efficiency gains are expected to be driven by initiatives in increasing train length, right-sizing the coal network and technological automation that will help reduce headcount,” said Robert W. Baird analyst Benjamin Hartford in his report.
Hartford attributed the stock gains Wednesday “more to the move in broader transports and industrials in today’s trading than investor reaction to CSX’s results in particular.”
Hartford maintains an “outperform” rating on the stock.
“CSX remains the most attractive rail, in our view. We remain patient with rails overall until visibility to a sustained path to return on assets improvement emerges. However, continued signs of industrial end-market stabilization could provide a catalyst to rails in mid-2016,” he said.
Barnes also maintained his “outperform” rating.
“The main concern is that the volume weakness has been further aggravated by another downturn in coal, muting the efficiency gains. While we see earnings pressure continuing, the current valuation is attractive, suggesting the market has priced in the downside risk,” he said.
Seidl raised his price target on the stock from $25 to $28 but maintained a “market perform” rating.
“We are keeping our market perform rating as we don’t see enough upside in the near term to justify an outperform rating,” he said.
Amazon.com is focused on logistics
If Jacksonville truly is “America’s Logistics Center,” then it’s only natural Amazon.com would want to open a fulfillment center here.
We don’t know for sure if Seattle-based Amazon is looking at Jacksonville, but there was of course much speculation last week that the so-called “Project Rex” looking to build a $200 million fulfillment center with 1,500 jobs in North Jacksonville is Amazon.
It would certainly fit in with Amazon’s logistics strategy, which has been a hot topic in the industry recently.
“Amazon keeps raising the bar. Seemingly not constrained by any pressure to consistently make money, Amazon has aggressively endeavored to define the emerging e-commerce supply chain,” Stifel Nicolaus analyst John Larkin wrote in a recent report on the transportation and logistics industry.
“Who knows what innovation Amazon next has up its sleeve? But, the company seems to be barring no expense to put in place a network that will be extremely difficult for other e-commerce retailers or logistics companies to replicate,” Larkin said.
“One alternative theory envisions Amazon opening up its logistics network to more than just the small retailers that already harness it,” he said. “With the incremental volume provided by other retailers, desiring to replicate Amazon’s delivery network, the company could further drive its costs of delivery per unit down and essentially make the majority of its profits in its logistics business rather than its retail business.”
The potential threat of Amazon’s logistic network to existing firms is strong enough that FedEx Corp. CEO Fred Smith found it necessary to address it during his company’s quarterly conference call last month.
“We have been aware of Amazon’s need for supplemental capacity related to inventory management, which is driving some of the investments they are making in transportation,” Smith said, according to a transcript of the call posed on FedEx’s website.
“While recent stories and reports of a new entity competing with the three major carriers in the United States grabs headlines, the reality is it would be a daunting task, requiring tens of billions of dollars in capital and years to build sufficient scale and density to replicate existing networks like FedEx,” he said.
“I think Amazon’s strategy is clear,” said FedEx Executive Vice President T. Michael Glenn in the call.
“The more distribution facilities they put up, the more they would like to be close to the end consumer, which by definition makes more deliveries on a local basis,” he said.
Both Smith and Glenn said they expect Amazon to remain a customer of FedEx.
But Larkin said FedEx and other logistics firms will be watching Amazon’s growth.
“Certainly, this story is in the early chapters, however, e-tailers, brick-and-mortar retailers, logistics companies and freight transportation companies ought to keep a keen eye trained on Amazon as the company’s development of a largely self-contained, low-cost supply chain could have negative margin and/or market share ramifications for any and all retail competitors and/or transportation and logistics service providers,” Larkin said.
Deutsche Bank halts North Carolina growth
Project Rex is seeking $18.4 million in city and state incentives to go ahead with its plans to build a Jacksonville fulfillment center.
Deutsche Bank has been growing its operations in Jacksonville with the help of four incentives packages since it first moved here in 2008. However, the Germany-based banking giant showed last week that money isn’t everything when it looks to add jobs.
The company announced it was freezing plans to add 250 jobs to its Cary, N.C., technology center because of North Carolina’s controversial new law that requires transgender people to only use bathrooms that match their gender at birth.
“We take our commitment to building inclusive work environments seriously. We’re proud of our operations and employees in Cary and regret that as a result of this legislation we are unwilling to include North Carolina in our U.S. expansion plans for now. We very much hope that we can revisit our plans to grow this location in the near future,” Deutsche Bank co-CEO John Cryan said in a news release.
Deutsche Bank employs 900 people at its Cary software application development center and said in September it would add 250 jobs. The company said while it is freezing the expansion, it is committed to keeping its existing presence in Cary.
Deutsche Bank last fall said it planned to add at least 350 jobs to its existing employment base of 1,700 in Jacksonville.
PHH losing key customer business
Deutsche Bank is moving some of its Jacksonville operations into a Southside building formerly occupied by PHH Corp., which moved to smaller offices in Baymeadows after downsizing its mortgage banking operations center.
New Jersey-based PHH reported a core loss of $152 million in 2015 and was hoping to break even or even produce a small profit this year.
However, the company last week announced it is losing a significant chunk of business from a key customer.
Merrill Lynch Home Loans has decided to move the origination of new applications for certain mortgage products to its internal operations, PHH said.
That business accounted for about 5 percent of PHH’s loan closing volume last year, the company said, and all of Merrill Lynch’s business accounted for 26 percent of PHH’s volume.
“There can be no assurances that the remaining Merrill Lynch origination activity with PHH will not also be subject to change during the remainder of 2016 or beyond,” PHH said in a news release.
Merrill Lynch is also taking over certain loan servicing operations that were outsourced to PHH and accounted for 18 percent of PHH’s total servicing portfolio.
“While we are disappointed with these changes, we intend to take appropriate measures to adjust our operations and incorporate these developments in our review of strategic options,” PHH Chief Executive Glen Messina said in the news release.
“We believe these decisions reflect the broader dynamics in our industry, including higher compliance and other costs associated with a more onerous regulatory environment. We remain focused on implementing the priorities we laid out for 2016 and the evaluation of all options, including capital structure and deployment alternatives, to maximize value for shareholders,” he said.
PHH’s stock dropped $2.15 to $10.28 last Monday after the announcement.
ParkerVision back in Nasdaq compliance
After a 1-for-10 reverse stock split at the end of March increased the listed price of its stock, Jacksonville-based ParkerVision Inc. said Friday it has been notified it is back in compliance with Nasdaq rules.
The stock had been trading well below Nasdaq’s required price of $1 but since the reverse split, in which shareholders received one ParkerVision share for every 10 they owned, the stock has been trading above $3.
ParkerVision said it continues trading on the Nasdaq Capital Market and Nasdaq advised the company the matter is closed.