By Tom Shean
The Virginian-Pilot
© January 6, 2008 (link to article on PilotOnline.com)

For investors in most of Hampton Roads' public companies, 2007 was a year to forget.

Shares in Smithfield Foods, Amerigroup and Hampton Roads Bankshares managed to gain ground, while Norfolk Southern's ended 2007 where it began. The stocks of several other companies in the region, however, were battered.

So what are their prospects in 2008?

That depends on the pace of economic growth - and consumers' willingness to spend, securities analysts and money managers said. Investors are still trying to discern whether higher oil prices and credit problems will force consumers to retrench, which would likely hobble growth, said Steve Marascia, an analyst with the Richmond-based brokerage firm Anderson & Strudwick.

Russell Lundeberg, chief investment officer at Barrett Capital Management in suburban Richmond, cited the resilience of the job market as something that could support sustained growth this year.

"The U.S. consumer is someone you never want to count out," he said. "They continue to find ways to maintain their spending habits."

At Standard & Poor's, the forecast is generally upbeat. Per-share earnings for its S&P 500 index will overcome an economically weak first half and climb 15.6 percent for the year, the investment research and credit-rating firm predicted. That would be up sharply from its estimated 1.4 percent increase in corporate earnings for 2007, S&P said.

However, analysts have been scaling back their estimates of corporate earnings for 2008 amid concerns that some companies, especially banks, will have greater difficulty making money this year.

A year ago, corporate America was flush with cash from robust earnings and was putting it to work. Some companies, including Chesapeake-based retailer Dollar Tree Stores and Norfolk-based rail carrier Norfolk Southern, bought back stock. Some boosted dividends and made acquisitions.

In October, Dollar Tree announced that its board authorized spending $500 million to repurchase shares. That came on top of the $99 million still available from an earlier authorization.

But don't count on abundant repurchases this year, analysts and money managers cautioned. Rather than spending their cash to buy back stock and bolster their per-share earnings, most companies will be hoarding cash this year to protect their liquidity.

That's especially true for banks because "the subprime problem is not fully disclosed," said Larry Bernert, a principal at the investment advisory firm Wilbanks, Smith & Thomas Asset Management Inc. in Norfolk.

Since August, investors have demonstrated their fear of the damage that securities related to subprime mortgages will inflict by dumping bank stocks. Despite efforts by the Federal Reserve to make credit more available to financial institutions, conditions related to subprime-related securities have worsened.

Shares of Wachovia Corp., a Charlotte, N.C.-based bank with a major presence in Hampton Roads, tumbled 33 percent in 2007 amid rising concerns about the quality of loans and debt securities on its books. In December, Wachovia disclosed that it will significantly boost its provision for loan losses partly because the value of securities backed by subprime loans continued to fall.

Expectations that their problem loans will climb have dampened investor appetite for many other banks, including community banks in Hampton Roads. Meanwhile, the spreads between the cost of their deposits and yields on their loans continued to narrow, threatening their biggest source of earnings - net interest income.

Shares of Commonwealth Bankshares, the Norfolk-based parent of Bank of the Commonwealth, tumbled 36 percent during 2007. The situation wasn't much better at Monarch Financial Holdings, the Chesapeake-based parent of Monarch Bank. Its shares skidded 35 percent.

The roster of Hampton Roads' public companies expanded in November when Lumber Liquidators went to the market with an initial public offering of 10 million shares at $11 each. The offering included 6.2 million shares from existing shareholders and 3.8 million from the company. The Toano-based retailer of hardwood flooring raised $36 million that it said it planned to use to repay debt and fund growth.

The stock price, however, faltered immediately after the offering and ended the year at $8.99, down 18 percent.

It was a different story at Dominion Resources, whose shares are widely held in the region. The Richmond-based utility holding company undertook a major restructuring last year that helped propel a 13 percent increase in its stock price. Using some proceeds from selling most of its oil-and-gas assets, Dominion bought back 57.75 million shares, or almost 17 percent of its outstanding common stock.

In October, Dominion raised its guidance for this year's operating income to between $6.10 and $6.25 a share from its earlier estimate of $6.

Here's a look at the year ahead for selected publicly traded major local employers as well as pending change in the largest nonprofit sector.

AMERIGROUP

Historically, health care stocks have attracted investors seeking refuge in a recession-proof sector.

However, the share prices of Virginia Beach-based Amerigroup and other managed-care companies serving Medicaid beneficiaries often suffer during the January-through-March quarter because state legislatures are convening, said Tom Carroll, a health care analyst with the brokerage firm Stifel Nicolaus & Co. Typically, Medicaid budgets attract much more attention from legislators and the media, he noted.

Companies delivering Medicaid managed care are likely to face greater scrutiny from regulators throughout 2008, Carroll said. That's partly because of a highly publicized investigation of WellCare Health Plans Inc., a Tampa, Fla.-based managed-care provider.

One major concern for Amerigroup, Carroll said, is the competitive environment in west Tennessee, a market that the local company is seeking to enter. The state's western region will be much more competitive than the middle Tennessee market, where Amerigroup began serving 170,000 low-income individuals in April.

If Amerigroup fails to win a place in west Tennessee, "it's a potential disappointment for investors" and could hurt the stock price, Carroll said.

Amerigroup's shares slumped last spring amid concerns about higher-than-expected costs for its dental and pharmacy coverage in parts of Georgia. After recovering during the summer and fall, the price was up 1.6 percent for the year.

Citing a 55 percent rebound from the stock's price in June, Stifel Nicolaus shifted its "buy" recommendation in November to a "hold."

Goldman, Sachs & Co., too, called attention to the rebound and downgraded its rating in November from a "buy" to a "hold."

The investment banking firm said it continued to view Amerigroup favorably because of its growth opportunities serving aged, blind and disabled individuals, the markets opening up in east and west Tennessee, and the expanded State Children's Health Insurance Program.

- Tom Shean

HOSPITALS

In the spring, Sentara Healthcare and Bon Secours Hampton Roads Health System should find out the fate of ambitious hospital proposals. If all are approved by the state, it would mean two new hospitals - one for Sentara, one for Bon Secours - in southern Virginia Beach; one new Bon Secours hospital in northern Suffolk; a greatly downsized Bon Secours DePaul Medical Center in Norfolk; and a 30-bed expansion for Sentara Obici Hospital in Suffolk.

But most likely, all the projects won't be given the go-ahead. Only the Obici project was recommended for approval in a recent Virginia Department of Health staff report, although the state health commissioner has the final say.

The most dire consequences of a denial could be felt at DePaul. Bon Secours officials have repeatedly warned that the aging, financially ailing facility on Granby Street would be shut down if its proposals aren't given the green light.

DePaul was the only hospital in South Hampton Roads to lose money in its fiscal year 2006, according to recently released data by Virginia Health Information, a nonprofit organization that keeps track of the health care industry. It lost more than $3 million and had an operating margin of -2.83 percent.

Most other hospitals in South Hampton Roads, all structured generally as not-for-profit institutions, boasted healthy margins, with the highest being Sentara Leigh Hospital in Norfolk at 12.39 percent. Industry analysts recommend a minimum of a 4.5 percent margin as a guideline for a financially healthy hospital.

Chesapeake Regional Medical Center, the last independent community general hospital in the region, had a 9.14 percent margin, continuing a financial turnaround from just a few years ago when it was losing money. In its fiscal year 2004, the hospital operated on a -1.93 percent margin.

- Nancy Young

SMITHFIELD

Two Richmond analysts had relatively upbeat takes on the prospects for Smithfield Foods Inc., the world's largest pork processor and producer.

Smithfield's stock yo-yoed last year, rising above $35 a share by mid-2007 and then, weighed down by a decline in hog prices and a rise in corn costs, dropping to the $28-to-$30 range by year's end.

"I would expect it to be higher by this time next year," said Heather Jones, an analyst with BB&T Capital Markets.

Although the market for pork in China didn't open as wide as some had expected, Smithfield's international operation is thriving and the company has found promising outlets in countries such as Russia, Jones said. She also predicted that the drop in pork prices would level off.

Steven Marascia, a researcher with Anderson & Strudwick, said it all depends on corn costs and beef and pork prices.

"Even if pork and beef prices remain flat and corn costs decline, that could potentially cause shareholders to increase demand for Smithfield," he said. "The profit margins are key: What do they sell their beef and pork for versus what is the cost to feed them."

A recession also could work to Smithfield's advantage, he said. "If a recession hits and we go into an economic slowdown," Marascia said, "corn prices will decline."

- Philip Walzer

NORTHROP GRUMMAN

With two major Navy shipbuilding contracts expected in 2008, the year is shaping up as "really big" for Northrop Grumman Newport News, shipyard President Mike Petters said.

The deals are to start full-scale construction of the Gerald R. Ford, the first in the Navy's new class of nuclear-powered aircraft carriers, and to begin production of the third block of Virginia-class attack submarines.

"Those two contracts, frankly, will set the pace for the yard for the next seven years or so, so those are very important," Petters said.

Congress has approved $2.8 billion to start the Ford work and has set aside money to accelerate production of the submarines. That means the sub agreement could cover eight or nine of the nuclear-powered vessels instead of the seven the Navy initially had planned.

Beyond that, the yard in 2008 expects to deliver the attack sub North Carolina and its last Nimitz-class carrier, the George H.W. Bush. It also will be busy with maintenance work, including starting an overhaul of the carrier Enterprise for its final years of service.

The shipbuilder's parent company - Northrop Grumman Corp., the No. 3 U.S. defense contractor by revenue - is based in Los Angeles. As Virginia's largest industrial employer, with some 19,500 employees, the shipyard's fortunes factor large in Hampton Roads.

While Petters said the shipyard's work force should be "pretty stable" in the year ahead, there's a wildcard. The labor contract with the United Steelworkers of America Local 8888, which represents about 9,000 hourly workers, expires in October. It's too early to say how the negotiations might fare, said Alton Glass, union president.

Overall, Northrop Grumman is "well positioned" for 2008, said Paul Nisbet, a defense analyst with JSA Research Inc. of Newport, R.I. Nisbet projects modest revenue growth and a 10 to 12 percent increase in earnings.

Its shipbuilding sector, including Newport News and two Gulf Coast yards, has generated close to 20 percent of the company's approximately $30 billion in annual revenue the past few years.

- Jon W. Glass

NORFOLK SOUTHERN

The economy and Congress will be among the items watched by Norfolk Southern Corp. and the other major U.S. railroads this year.

The country's economic performance is critical because railroads move so many pieces of the economy - everything from automobiles to imported electronics to grain. If the economy is strong, there's greater demand for freight to be moved by railroads.

Whatever growth occurred in the economy last year stemmed from service industries, a segment not requiring much rail transportation, said Tom White, a spokesman for the Association of American Railroads. Up to the last week of 2007, the major U.S. railroads hauled 2.4 percent fewer carloads of material than in the same period in 2006, and moved 2 percent fewer truck trailers or cargo containers on railcars.

"The year was a little bit on the off side," White said.

Several pieces of legislation before Congress may also affect the railroads' business. The pending bills deal with railroad safety, competition and antitrust issues. The railroads warn that if the industry is re-regulated, it would restrict much-needed investments in their rail networks.

One bill strongly supported by Norfolk Southern and the other railroads is a 25 percent tax credit for projects that add railroad capacity.

In 2008, Norfolk Southern will continue moving ahead with two major public-private projects. Construction is under way on the $313 million Heartland Corridor project, which will raise the heights of 28 rail tunnels between Hampton Roads and Chicago. The taller tunnels will accommodate cargo containers stacked two-high on railcars, shaving up to a day's transit time between Hampton Roads and the Midwest. Work began last year and is expected to be completed in early 2010.

Norfolk Southern is also developing the $2 billion-plus I-81 Crescent Corridor, which would stretch from Louisiana to New Jersey. The project, still in the planning stages, involves upgrading and expanding existing rail lines and building new terminals.

- Gregory Richards