Earnings season starts despite shutdown; Fidelity upgraded after big drop

First-quarter reports are expected to be strong as COVID-19 impact hits in the second quarter.

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  • | 5:10 a.m. April 16, 2020
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Much of the business world is shut down but earnings season is moving right ahead, with three of Jacksonville’s biggest companies reporting first-quarter results next week: CSX Corp., Landstar System Inc. and Fidelity National Financial Inc.

Freight transportation companies like CSX and Landstar are generally among the first to report earnings every quarter and usually are considered a bellwether of the overall state of the economy. 

However, these aren’t usual times.

Morgan Stanley analyst Ravi Shanker said last week in a report on transportation stocks, including CSX and Landstar, that we likely won’t learn much from their quarterly reports.

“First-quarter results across the space may be better than expected but will likely be irrelevant as investors look ahead to a third-quarter rebound (once we make it past the historic second-quarter trough),” he said.

“We expect management to provide little by way of a forward outlook given unprecedented uncertainty.”

Although the economy has collapsed in the last few weeks, transportation companies were operating at high levels through most of the first quarter, Shanker said.

“Based on first-quarter datapoints, it appears that (the) first quarter was relatively ‘normal’ in January, February and early March before a burst of activity in mid-March ahead of extended shutdown preparations followed by a cliff in the last week of March,” he said.

“The end result is that (the) first quarter is likely to be relatively normal or even slightly better than normal vs. the overall macro data that we have seen.”

Transportation stocks plummeted along with the rest of the market over the past two months. With CSX down 24% from its February peak of $80.73, Goldman Sachs analyst Jordan Alliger raised his rating on the railroad company from “neutral” to “buy” last week.

“We take the sharp downdraft in CSX equity as an opportunity to upgrade the shares,” Alliger said in his report on transportation stocks.

“While the upcoming quarters certainly bring elevated EPS risk – despite our estimate reductions – we believe CSX on a 12-month basis offers solid risk/reward.”

Alliger maintains a “sell” rating on trucking company Landstar with a $94 price target.  Landstar closed last week at $104.09, down only about 6% from its February pre-crash level.

Fidelity upgraded after big drop

Fidelity National Financial lost about half its value in the recent crash. But Keefe, Bruyette & Woods analyst Bose George upgraded the stock from “market perform” to “outperform” ahead of the earnings report, as part of a general upgrade of the title insurance industry.

“Despite facing near-term headwinds because of lower residential and commercial transaction volumes that will weigh on earnings, we are upgrading the title insurers given the compelling valuations” after recent declines, George said in a research note.

“We expect this business to emerge from the recession with most of its earnings power intact,” he said.

George set a price target of $37 for Fidelity, which was trading at $25.69 at the time of his upgrade last week.

Analyst assesses Regency tenants

Before a rebound last week, Regency Centers Corp.’s stock had lost about half its value since February as investors weigh the impact of store closings on the Jacksonville-based company’s shopping centers.

In a research note on Regency, Wells Fargo analyst Tamara Fique estimated about 53% of tenants in the company’s centers remain operational. 

Regency focuses on centers anchored by supermarkets, which continue to operate as “essential” businesses, and its centers have other tenants such as quick-service restaurants that remain open for takeout and delivery meals.

It’s difficult to predict when the shopping centers will return to normal, Fique said.

“With government stimulus aimed at keeping small businesses afloat and landlords working with tenants on rent deferrals, we are projecting that a majority of tenants will reopen stores,” she said.

“Human behavior is also a factor and there is uncertainty about how and when consumers will return to previous activities which could extend the pressure on retailers beyond reopening dates. This behavior may vary by geography with harder hit areas more reluctant to resume normal activities.”

Fique lowered her price target for Regency from $75 to $55 but maintained an “overweight” rating on the stock, which closed last week at $44.12.

FIS reduces earnings forecast

Fidelity National Information Services Inc., or FIS, slightly reduced its first-quarter earnings forecast on April 13.

The Jacksonville-based financial technology company said it is expecting adjusted earnings of $1.26 to $1.28 a share, above first-quarter 2019 earnings of $1.16 but below its previous forecast of $1.30 to $1.34.

“As U.S. and foreign governmental authorities imposed social distancing, shelter-in-place or total lock-down orders, spending declined, most notably in travel, restaurants, entertainment, and retail, resulting in a rapid deterioration in payments volume and transaction trends on a worldwide basis,” FIS said in a news release.