J.B. Hunt Transport looks for strong quarter despite rising costs

Freight volume has been strong across the trucking industry in the third quarter which analysts agree should propel J.B. Hunt Transport’s profits up 13% over the same period in 2013. Lowell-based Hunt reports earnings Tuesday (Oct. 14).

Wall Street consensus is 85 cents a share with net income ranging from $96 million to $100 million for the three-months ending Sept. 30. Net income earned in the year-ago period totaled $89.47 million, or 75 cents per-share.

“Freight volumes are growing nicely on a year-over-year basis for most trucking sectors as economic growth remains solid,” Bob Costello, chief economist for the American Trucking Association, said during an Oct. 6 ATA annual conference.

Analysts with Baird Equity Research note that spot truckload activity has been healthy in the third quarter and Hunt is poised to benefit from overall rail growth up 5.6% year-over-year in the quarter. Baird also notes that rail growth has subsided slightly since peaking at 6.8% in the second quarter.

Baird expects rate increases to continue in 2015 citing shippers' willingness to secure capacity in anticipation of some tightness in the fourth quarter and the likelihood of continued rate growth of 5% in 2015.

“Inflationary cost pressures have limited carrier margin expansion despite contractual rate increases of 3.4% in truckload, 2.3% for intermodal with driver pay rising between 5% and 15% an incremental headwind year-over-year,” Baird analyst Benjamin Hartman noted in a Sept. 5 note to investors.

Though Hunt’s profits don’t show the tension brewing from a looming driver shortage, execs and analysts have classified the challenge as “major” going forward. Costello said industry revenue and average revenue per mile are rising amid tighter capacity restraints linked to the driver shortage, but the effects will start to show in next few quarters.

The shortage was “as bad as ever and is expected to get worse in the near term,” as freight volumes continue to grow, Costello said. He reported that turnover – often a proxy for tracking the driver shortage – rose 11 percentage points to an annualized rate of 103% in the second quarter. The increase set the rate at its highest point since the third quarter of 2012.

“These turnover rates show that the shortage is acute, and if the freight economy continues to grow, it will worsen very quickly.”

J.B. Hunt CEO John Roberts III said in July that a difficult driver recruitment climate and driver growing driver shortage would dampen financial performance for the dedicated contract services and truckload segments in the coming quarters. A recent white paper compiled by J.B. Hunt Transport notes that “fiscal pressures are being felt across the transport and service industry. Driver shortage and retention topped the list of obstacles. The paper also suggests that carriers will raise rates well into 2015  to offset added expenses.

The report said carriers continue to adjust to 3% to 5% capacity reductions created by new hours-of-service regulations that went into effect July 2013. That gap is expected to widen when the use of electronic logging devices become mandated in late 2015 or early 2016.

Other regulation on the mind of industry execs is the mandated phase in of greener trucks between 2014 and 2018, the paper notes. ACT Research estimates the cost of a new tractor has increased by roughly 25% over the 2006 to 2012 period. Furthermore, following each EPA mandate, Class 8 tractors have experienced an average 10% rise in repairs and breakdowns, according to ACT Research.

Hunt notes in its white paper conclusion that shippers should prepare for significant cost recovery efforts by carriers — highway and intermodal — beginning in late 2014 and into 2015.