J.B. Hunt rebounds with 6.3% income gain, warns of driver shortage

J.B. Hunt Transport Services picked up steam in the second quarter after a sluggish start to fiscal 2014. The Lowell-based logistics firms reported solid net profits of $93.4 million, up 6.3% from the $87.7 million pocketed in the year-ago period. 

The results were inline with Wall Street’s consensus 79-cent earnings per share estimate, improving from the 73-cents per diluted share earned in the second quarter of 2013.

Top-line revenue grew in the quarter to $1.55 billion, up 12.3% from the $1.38 billion reported a year ago and surpassing Wall Street’s estimate of $1.54 billion.

All four of the company’s divisional pistons were firing in the quarter, despite some challenging metrics in the intermodal and truckload operating segments.

“The slowdown in train velocity and the difficult driver recruiting environment has challenged our (intermodal) growth in JBI. We are pleased we were able to maintain profitability levels despite these obstacles. The worsening driver supply conditions will continue to be a headwind for (dedicated contract services) DCS and (truckload) JBT as well. The planned improvement in truckload is ahead of schedule and though there is more to do, we are extremely pleased with the progress thus far,” CEO John Roberts III, said in the release. “While we continue to work to improve customer service and equipment utilization levels to achieve our expected market growth, the second quarter results demonstrate the combined earnings value of our four diversified, yet integrated, business units.”

HIGHER PRICING, MORE LOADS
The robust gains in top revenue were attributed to an 8% load growth in the intermodal division and 15% more loads covered in the firm’s brokerage division – Integrated Capacity Solutions. More loads helped to drive 9% and 31% increases in the segments, respectively.

The Dedicated Contract Services segment’s revenue rose 15% behind the better productivity from several large private fleet conversions implemented a year ago. Tyson Foods’ live haul operation is one of those private fleet conversions.

The laggard truckload segment, under the new management of Shelley Simpson, returned better than expected results. The truckload segment reported flat revenue, despite running an 8% smaller fleet.

“The company is increasingly becoming a provider of logistics solutions for its customers. Shelley Simpson is driving the effort and is providing strong leadership in sales and marketing plus the integrated capacity solutions unit,” said John Larkin, an analyst with Stifel Nicolaus. (Stifel conducts investment banking services with J.B.Hunt and is compensated accordingly for those services.)

Larkin recently said it makes sense for Simpson to lead Hunt’s “long suffering truck unit as some ICS customers prefer JB Hunt to provide its own truckload services as a component of integrated solutions.”

“While the truck unit, at its reduced size, will never be all things to all people, it can be a valuable arrow in Simpson’s quiver as she and her teams work to continuously optimize the supply chains of the company's customers,” Larkin, who is neutral on these shares shares, noted last quarter.

Hunt reported operating income of $159 million in the second quarter, versus $147 million a year ago. The increase in operating income derived from load growth, customer rate increases and freight mix changes was partially offset by lower box turns from slower train velocities, higher driver recruiting and retention costs, higher purchased transportation costs, higher safety and insurance costs and increases in equipment and tire costs compared to second quarter 2013.

BULLISH OUTLOOK
Wall Street approved of Hunt’s second quarter performance as shares (NASDAQ: JBHT) rallied on the news trading up nearly 2% at $76.02 in afternoon trading. Volume was heavy with more than 887,000 shares changing hands before noon. Average daily volume for the company is 767,000.

Economists view logistics companies such as Hunt as a barometer on economic growth given they are hauling goods on everything from big screen televisions delivered to consumer’s front door to live chickens supplying restaurants and grocers to millions of items and fixtures for Wal-Mart Stores and dozens of other retailers.

Analysts with Stephens Inc. rate J.B. Hunt shares as a buy with a target price of $87, despite a shaking first quarter.

“We remain encouraged by recent trends in the business now that abnormally harsh 1Q weather is behind us. We continue to view JBHT as a core transport holding and a bellwether in the domestic transportation space, and view recent anecdotes of tight truckload capacity as a leading indicator for an improving intermodal rate environment,” said Brad Delco, analyst with Stephens. (Stephens conducts investment banking services for J.B. Hunt is compensated accordingly.)

While analyst and Hunt management expect a strong back half of 2014, it won’t be without a few challenges. Costs related to driver recruitment and higher driver pay, rising insurance expenses and increased equipment expenditures will have to be factored into the bottomline this year. Stephens estimates Hunt will earn $3.15 per share this fiscal year, gaining some momentum in the next two quarters behind strength in all four of its operating segments.

SEGMENT RESULTS
Intermodal
Segment revenue of $931 million, up 9%
Operating income totaled $113.4 million, up 2%
Loads increased 8%, revenue per load rose 1.5%, excluding fuel surcharge.
68,700 units of trailing capacity and 4.500 power units available to the dray fleet.

Dedicated Contract Services 
Segment Revenue of $348 million, up 15%
Operating Income totaled $30.3 million, up 2%
Loads increased 23%, revenue per load rose 1.2%
625 new revenue producing trucks were added in the quarter to 6,538 units.

Integrated Capacity Solutions 
Segment Revenue of $173 million, up 31%
Operating Income totaled $ 6.2 million, up 50%
Loads increased 15%, revenue per load rose 14%.
Two new branches opened in the quarter bringing the total branch count to 26. The carrier base increased 9% and the employee count increased 23% to 36,300 in the quarter

Truckload
Segment Revenue of $101 million, flat
Operating Income totaled $ 9.4 million, up 217%, helped by $2.8 million gain from equipment sales.
Hunt operated 1,860 tractors compared to 2,018 a year ago at the end of the quarter.