Tighter margins, competition threaten profit, revenue growth at J.B. Hunt Transport Services

Analysts who follow Lowell-based J.B. Hunt Transport Services say the logistics giant is facing margin pressures as intermodal rail costs have risen and competition for business continues to reduce rates across several of its business units.

While analysts expect volume growth to remain somewhat stable they said it will come at the expense of lower revenue and operating margins. The challenges expected for the remainder of 2016 prompted J.B. Hunt Transport to reduce its earnings guidance for the rest of this year in its last earnings release.

Hunt expects to see top line revenue growth pressured in three of its four operating segments because of competitive rate pressure with excess trucking capacity in the market. The brokerage segment, which does not own assets, is the only one of the four expected to see positive revenue growth and margin expansion through the end of this year. Cowen and Company analysts noted multiple factors at play in Hunt’s large intermodal segment that may have an impact on third quarter and fourth quarter results. They cite the recent “Hanjin bankruptcy, which has had a ripple effect upon domestic rail intermodal pricing.” IDS Transportation Services reports the change in eastbound domestic intermodal pricing increased by as much as 25% from July to August. Year-over-year pricing has increased close to 30% in some eastbound lanes from August 2015.

According to Cowen this spike in domestic intermodal pricing is closely correlated with both the Drewry Container Freight Rate weekly insight and Shanghai Containerized Freight Index, SCFI, as container prices were up over 25% as of mid-September.

“Many international containers that arrive to the West Coast are transloaded either in Los Angeles or the Inland Empire into domestic intermodal containers. From there they are shipped eastbound to customers in the Midwest, South and East Coast, so this correlation is a direct link in the supply chain. Through June, rising rail purchased transportation costs were the primary driver for the reduction in JBI operating income. The recent spike in eastbound pricing will likely further impact these rail costs,” Cowen notes.

The problem with the rising costs is that much of them can’t be passed on to customers given the competition from excess capacity. Cowen said this will hurt Hunt who through June 2016 witnessed JBI operating revenue growth near 5% including fuel surcharges. The company now expects annual growth excluding fuel surcharges between negative 1% and 3%. This is a problem for Hunt given that 58% of its operating revenues in the first half of 2016 came from the intermodal segment.

“Clearly, J.B. Hunt has not had success in negotiating higher customer rates to offset increasing rail, insurance and driver-related costs. Based on J.B. Hunt’s contract arrangements, the company is highly dependent upon BNSF, Norfolk Southern, and CSX for the rail moves for its customers,” Cowen noted.

Transport Topics reports the West and East Coast seaports saw robust traffic from containers in August compared to a year ago as this year’s shipping season likely peaked. Cowen said if increased container traffic continues Hunt’s margins could remain tight if shippers are unwilling to negotiate contract increases.

Cowen predicts Hunt’s intermodal operating revenue could decline in the high-single digits if margins remain compressed. The investment firm also cited competitive pressures for Hunt’s Dedicated Contract Services as more carriers have aggressively transitioned to this type of market. Swift, Ryder, C.R. England and P.A.M. has each grown their dedicated operating segments adding excess capacity to the overall market.

Shares of J.B. Hunt Transport (NASDAQ: JBHT) closed at $78.68 on Monday (Sept. 26), down 13 cents. Since the start of 2016, Hunt’s stock price is up 10.3% from where it traded on Jan 4 ($71.32). Hunt shares peaked in April at $89.43 and have traded below the $80 threshold since mid-September.

Hunt will report earnings around Oct. 10 and Wall Street expects a consensus of $1.03 per share on revenue of $1.68 billion. Cowen said if the margin pressures continue, consensus earnings and revenue will likely be lowered for the remainder of the year.