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Basch Report
Jax Daily Record Monday, Oct. 9, 201706:50 AM EST

Advanced Disposal takes hit from Irma

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Price of recycled paper also weighing on Ponte Vedra company’s stock.
by: Mark Basch Contributing Writer

Waste management companies like Advanced Disposal Services Inc. have been very busy during the cleanup from Hurricane Irma and other recent storms.

But more work isn’t good news for the companies’ stocks.

Stifel analyst Michael Hoffman last week lowered his rating on Ponte Vedra-based Advanced Disposal from “buy” to “hold” and downgraded other solid waste stocks, in part because of the hurricane impact.

Business disruptions from hurricanes Irma in Florida and Harvey in Texas will cost the companies “pennies not nickels, but negative none the less and the headline risk is real,” Hoffman said in his report.

Advanced Disposal went public a year ago, ironically as Hurricane Matthew was bearing down on Florida. The stock has been a success, rising from its $18 IPO price to a high of $25.71 Tuesday, the day before Hoffman's downgrade.

The stock has benefited from an overall rally in waste management companies. Hoffman rated the industry as a “buy” in 2014 and the group doubled in price since then, he said in his report.

“We acknowledge the group could be defined today as priced to perfection. This does not leave room for unfavorable news,” he said.

Although the hurricanes are impacting the stocks, the real issue overhanging the industry is a drop in prices for recycled paper.

“This is a relevant topline headwind with a more modest but real profit hit in the fourth quarter and fiscal year 2018,” Hoffman said.

Hoffman estimates Irma will reduce Advanced Disposal’s earnings by only a penny per share.

“Hurricane Irma is likely to hit Advanced Disposal with costs in the third quarter for business interruption and then add in overtime and a short-term loss of productivity too,” he said.

Some of the companies will get a benefit from debris disposal in their landfills.

However, Advanced Disposal’s “landfill position in Florida is modest and therefore any offsetting benefit is assumed to be muted,” he said.

Advanced Disposal adds board member

While analyst Michael E. Hoffman downgraded the stock, Advanced Disposal last week added Michael J. Hoffman to its board of directors.

The new director, who is apparently no relation to the analyst, is chairman and former CEO of The Toro Company.

Hoffman will serve as chair of Advanced Disposal's nominating and corporate governance committee and as a member of the audit committee.

The company said with his appointment, all board committees comprise independent directors.

CSX downgraded, but not for service

Service issues at CSX Corp. continue to make the headlines, as customers complain about disruptions as new CEO Hunter Harrison implements his operating plan.

However, Morgan Stanley analyst Ravi Shanker highlighted other issues last week as he downgraded his rating on the Jacksonville-based railroad from “equal weight” to “underweight.”

“At the outset, note that our downgrade has little to do with the ongoing service issues at CSX. Though they do not help CSX's cause, we believe that service disruption is a natural outcome of implementing Precision Railroading and that CSX will eventually get a handle on its issues,” Shanker said in his report.

“On the other hand, we believe deteriorating end markets and tougher pricing conditions are likely to make it hard to hit a 58 percent operating ratio (OR) target within the two-year time frame that consensus expects, if at all,” he said.

Shanker thinks the operating ratio — operating expenses divided by revenue — will be the biggest issue when CSX holds an analyst day meeting at the end of this month.

“We find it hard to envision what Mr. Harrison might say at the event that will come as a positive surprise to expectations already built into the stock in the mid $50s,” he said.

Many investors are expecting, based on Harrison’s track record at other railroads, that CSX can reduce its operating ratio from last year’s 69.4 percent to 58 percent within two years and 55 percent by 2020, Shanker said. But he thinks Harrison may set a goal of reaching that level when his four-year contract ends in 2021.

While investors want to hear about the operating ratio, Shanker thinks management will focus on the service issues at the conference “even if investors don't seem to care too much about it.”

“While CSX's current service issues have come as a shock to most investors, few believe that management will not get on top of this quickly and many even believe that this is a good opportunity to accelerate change at CSX,” he said.

Analyst upgrades Regency Centers

As investors continue to wrap their heads around the current retail environment and how it will impact shopping center developers, another analyst revised his rating on Jacksonville-based Regency Centers Corp.

After downgrading Regency to “underperform” last month, Boenning & Scattergood analyst Floris van Dijkum raised his rating back to “neutral” last week after the stock edged lower.

“We upgrade Regency despite its premium NAV (net asset value) valuation relative to its peers due to the company’s solid fundamentals and strong earnings momentum,” van Dijkum said in his report.

“We had lowered our rating on Regency in early September when its shares traded at $65 per share. While Regency continues to command a premium valuation, we like its risk-reward proposition better at $62 per share,” he said.

Regency’s portfolio of neighborhood shopping centers consists largely of malls anchored by supermarkets. One issue raising industry concerns is the impact of Amazon.com’s acquisition of Whole Foods.

“Regency is the largest landlord of Whole Foods (with average tenant sales of $1,000 per square foot in its portfolio), Albertson’s, and Publix in our coverage universe,” van Dijkum said.

“While the impact of Amazon’s Whole Foods acquisition remains unknown, Regency’s grocery focus has produced solid results and management remains confident its grocery locations should provide a safe-haven in an omnichannel world.”

Regency offers “sector-leading fundamentals” with strong same-store net operating income growth, van Dijkum said.

“Regency’s SS NOI performance is expected to top the strip sector per management’s guidance and its higher than average small shop percentage should allow for better future growth,” he said.

Black Knight spinoff complete

Black Knight Inc. began trading last Monday as an independent company after Fidelity National Financial Inc. completed the distribution of its majority stake in the mortgage technology company.

Fidelity stockholders received about 0.307 shares of Black Knight for every Fidelity share they owned. The total number of shares distributed was 83.3 million.

Black Knight and title insurance company Fidelity both are headquartered in the same Riverside Avenue office complex.

Black Knight's stock now trades under the ticker symbol “BKI” on the New York Stock Exchange. It was previously trading under “BKFS,” with the company formerly named Black Knight Financial Services Inc.

Einhorn Tegna stake fuels speculation

An activist hedge fund manager familiar to Jacksonville investors may have his sights set on Tegna Inc., owner of two Jacksonville television stations.

Greenlight Capital Inc. disclosed in a Securities and Exchange Commission filing that it acquired about 1 percent of Tegna's stock, a relatively small amount.

However, Greenlight President David Einhorn is well known for challenging management of companies he invests in, so the investment is “heightening speculation that activists may be scrutinizing Tegna for a takeover,” according to a story last week by TheStreet.com.

Tegna operates 46 television stations, including WTLV TV-12 and WJXX TV-25 in Jacksonville.

The company two years ago split up with newspaper operator Gannett Co. Inc. The stock has underperformed, falling from about $20 when the split was completed in June 2015 to about $13 recently.

Tegna recently spun off its Internet automobile business, Cars.com, and agreed to sell its majority stake in another online company, CareerBuilder. That puts basically all of its focus on the television business. 

TheStreet.com story speculated that the station group could become a target of a larger media operator, and Einhorn is an investor who could push that process.

Einhorn became known to Jacksonville investors in 2010 when he began publicly criticizing management of The St. Joe Co., the real estate development company formerly based in Jacksonville.

Einhorn's position that St. Joe's land holdings were overvalued and the stock would fall began a series of events that resulted in an upheaval in the company’s management.

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