Monday, September 11, 2006

Calls of Note Part 3

- JP Morgan is adding the Overweight rated CSX Corp (NYSE:CSX) to the JP Morgan Focus List with a $42 December 2007 price target (13x P/E applied to $3.22/share EPS in 2008). CSX's recent transition to a trend of volume growth gives the firm increased confidence that execution of its turnaround story will drive strong EPS growth and significant upside for CSX stock.

Following a 2.4% decline in volumes in 2005, a decline of 1.0% in 1Q06 and only 0.1% growth in 2Q06, CSX has transitioned to meaningful volume growth with 3.4% QTD volume growth in 3Q06. In 3Q CSX has continued to realize y/y improvement in terminal dwell time and other operating metrics which indicate it remains on a path of improving rail network operation and cost performance. The firm expects solid margin expansion in 2H06 for CSX, but notes that the pace is likely to slow somewhat due to a headwind from a sharply lower fuel hedge position. CSX is essentially unhedged in 2H06 and in 05 CSX realized its maximum hedge benefit in 3Q.

Despite weakness in economically sensitive segments, CSX has realized solid 3Q volume growth
driven by coal and grain along with an upturn in intermodal. Firm expects the solid volume growth to drive in line to modest upside EPS for CSX in 2H06.

In firm's view, CSX's current P/E valuation of 11.4x on 2007 EPS estimate is attractive. Historically the railroad group has traded in an average P/E range of 11x-15x on one year forward EPS.

Notablecalls: CSX is worth keeping on the radar. May become an interesting long if it breaks the $30.5 level. That of course may happen already around the open leaving us without a meaningful trigger.

- JP Morgan comments on @Road (NASDAQ:ARDI) asking if last week's contract wins mark an inflection point? ARDI's fixed-cost hosted MRM service model should yield strong earnings growth if the company can only generate top line growth. Unfortunately 2004-2006 has been a relatively disappointing period for the company, following two prior years of strong, 30%+ revenue growth.

The BellSouth and E.ON contracts add to a sequence of small contract wins and channel partnerships in 2006, including the Eaton Corp and Telstra partnerships, and contracts with Service Master and Performance Transportation. The 2006 customer roster is growing and management says thepipeline activity is at historical highs.

A good phase but not enough to establish lift-off. The subscriber count stands at only 151K (flat y/y, including the Verizon loss), and the BellSouth and E.ON contract wins do not represent 'green field' triumphs, merely extensions of existing customer relationships.

So, in short, the firm is not convinced that the inflection point has been reached. MRM remains a fragmented industry, and although the competitive landscape has not deteriorated in 2006, they continue to see low-end, handset based offerings in the space. Nonetheless, there's been enough activity at ARDI this year to justify putting the stock on the radar.
Maintains Neutral.

Notablecalls: ARDI stock was up 10% on Friday. Think the comments from JP Morgan will cap further upside.

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