UPDATE 3-CSX expects higher profit, sues hedge funds

(Adds CSX CEO, analyst comment, bylines; updates stock action)

By Scott Malone and Nick Carey

BOSTON/DETROIT, March 17 (Reuters) - U.S. railroad company CSX Corp (CSX.N) forecast on Monday its first-quarter profit would rise by up to 48 percent and said it filed suit against two hedge funds that have proposed a slate of new directors.

CSX charged the funds violated U.S. securities laws by not disclosing their full holdings in the company.

"We saw some extraordinary and strange stock movements around our record date," CSX Chief Executive Michael Ward told Reuters in a telephone interview. "We want to get a full hearing on this in the courts before we have our shareholders' meeting."

CSX said it would now hold its annual meeting on June 25, from a previous date of May 7.

The Children's Investment Fund and 3G Capital Partners said the allegations were without merit and promised a vigorous defense.

Jacksonville, Florida-based CSX said it expects first-quarter profit of 74 cents to 77 cents per share, including a one-time gain of 4 cents per share related to the sale of real estate.

Analysts, on average, expect 64 cents per share, according to Reuters Estimates.

Ward said freight volumes were down slightly in the first quarter so far, due to the ongoing U.S. housing sector meltdown and weak sales in the automotive sector.

"Both of those sectors are showing no signs of recovery at this point," he said.

But Ward said CSX's strong first quarter has been driven by growth in shipments of metals, fertilizers, ethanol and coal for export. The railroad has also stuck to its forecast of freight rate increases in a range from 5 percent to 6 percent in 2008, he said.

"So far we have been on the high end of that range," Ward said.

CSX forecast full-year profit of $3.40 to $3.60 per share. Wall Street expected $3.05.

The company also said it aims to grow earnings per share by 18 percent to 21 percent annually through 2010, and it is targeting $3 billion of share buybacks by the end of 2009.

Credit Suisse raised its target price on CSX stock to $60 from $53.

"The company's positive stance for the near term is a welcomed sigh of relief in the midst of recession fears, the ongoing credit crisis and general turmoil in the broader market," Credit Suisse analyst Jason Seidl wrote in a research note.

Shares of CSX were up 3.6 percent to $50.77 in afternoon trading on the New York Stock Exchange, outperforming the S&P railroad index .GSPRAIL which was up just 0.3 percent.

SUIT FILED

In papers filed in U.S. District Court for the Southern District of New York, CSX alleged that executives at London-based The Children's Fund, commonly called TCI, told CSX management they had amassed a stake of up to 14 percent in the company, while claiming smaller holdings in filings with the U.S. Securities and Exchange Commission. It did this through a system of swaps, the suit contends.

TCI in December proposed a minority slate of five directors to stand for election at the railroad's 2008 annual meeting of shareholders. TCI says CSX has underperformed in operational and financial metrics compared with similar companies.

"The board concluded that TCI is not simply interested in having a representative voice on the board, but instead is seeking to achieve effective control of the CSX board of directors and dictate company strategy," said a statement from Edward Kelly, the presiding director of CSX's board.

In a joint statement, the funds said: "These allegations are wholly without merit and we will defend ourselves vigorously."

JP Morgan analyst Thomas Wadewitz said the battle with the funds was producing results at CSX.

"Due to their proxy fight with activist shareholders over five board seats, we believe that CSX is taking the most aggressive approach of the major rails in terms of raising prices and cutting costs," Wadewitz wrote in a research note. (Editing by John Wallace and Tim Dobbyn)