Reduced demand and higher driver wages push J.B. Hunt earnings down 4.9% (Updated)

“Tepid customer demand” and the lower freight rates that often accompany such demand pushed third quarter earnings for J.B. Hunt Transport Services below the same period in 2015 and below the consensus of analyst estimates.

For the quarter ended Sept. 30, the Lowell-based transportation company posted net income of $109.425 million, below the $115.139 million in the third quarter of 2015. Per share net income of 97 cents was off the consensus estimate of $1.03 per share.

Total revenue in the quarter was $1.69 billion, ahead of the consensus estimate of $1.68 billion and better than the $1.586 billion in the third quarter of 2015.

The company noted in the earnings statement posted early Monday (Oct. 17) that headwinds during the quarter were “increased rail purchase transportation rates, lower box turns, increases in driver wages and recruiting costs, losses on the sale of used equipment (versus gains in 2015), increased legal and consulting costs and higher equipment maintenance and ownership costs.”

However, the company is still ahead for the year. Net income for the first nine months of 2016 totaled $314.534 million, just ahead of the $310.49 million in the same period of 2015. Total revenue in the nine months is $4.834 billion, better than the $4.566 billion in the same period of 2015.

SEGMENT FINANCIALS
• JBI (intermodal)
In the company’s intermodal unit, its largest by revenue, quarterly operating income was $116.9 million, down 7%. Segment revenue in the quarter was $970 million, up 2%.

“Benefits from improved volumes, improved operating efficiencies from network balance and reduced reliance on third party dray carriers were offset by lower customer rates, increases in rail purchased transportation rates, equipment ownership costs including lower box utilization, increased insurance and claims costs and increased costs to attract and retain drivers,” according to the earnings report.

• Dedicated Contract Services
Quarterly operating income in the dedicated contract division totaled $52.5 million, up 16%. Segment revenue was $394 million, up 6%. Helping boost the division were 205 more “revenue producing trucks” in the quarter than the same quarter of 2015.

• Integrated Capacity Solutions
Quarterly operating income in the company’s logistics unit was $8.5 million, down 26%. Segment revenue in the quarter was $233 million, up 35%.

“Load volume increased 88% while revenue per load decreased 28.5% due to lower fuel prices, freight mix changes driven by customer demand and lower customer rates on contractual business,” the company noted in the earnings report.

• Trucking
Operating income in what was once the company’s only line of business was $5.1 million, down 55%. Segment revenue was $97 million, flat compared to the same quarter of 2015.

J.B. Hunt shares (NASDAQ: JBHT) closed Friday at $80.02. In the past 52 weeks the share price ranged from an $89.43 high to a $63.58 low.

NATIONAL TRENDS
High inventory levels among retailers and manufacturers continue to be a concern for freight sector economists, but truck tonnage was up almost 6% in August.

August shipments were down 1.1%, and freight expenditures fell 6.3% compared to the same period in 2015, according to the Cass Freight Index. The American Trucking Associations’ For-Hire Truck Tonnage Index rose 5.9% in August, following a 0.2% decline in July. Year-to-date, compared with the same period in 2015, tonnage was up 3.5% at the end of August.

Donald Broughton, a chief market strategist and senior transportation analyst with Avondale Partners, who provides economic analysis for the Cass Freight Index, said weakness in many economic sectors keeps shipments and expenditures on the decline.

“August’s Cass Freight Index continued to signal that overall shipment volumes (and pricing) are persistently weak, with increased levels of volatility as all levels of the supply chain (manufacturing, wholesale, retail) continue to try and work down inventory levels,” Broughton wrote.

ATA Chief Economist Bob Costello said the broad inventory “overhang” makes it difficult to gauge trucking sector trends.

FUTURE TRENDS
However, the sector is expected to see healthy growth in the next decade. According to an Oct. 12 report from American Trucking Associations, overall freight tonnage will grow 35% by 2027.

The report, “U.S. Freight Transportation Forecast to 2027,” also shows the amount of freight moved by trucks will increase nearly 27% in the same period.

“Overall, other modes of transportation — truck, rail and water — will lose market share to pipeline, which will grow from 10.5% to 17.4% between 2016 and 2027 primarily as a result of growth in the U.S. energy sector,” according to a news release from the trucking organization.

Regarding trucking, truckload volumes will increase 2% annually through 2022 and 1.6% each year between then and 2027. Less-than truckload volume will rise 3% annually through 2022 and 2.8% between then and 2027. Private carrier volumes will increase 2.3% annually until 2022 and 2.1% each year over the next five years.

“No one can know exactly what the future holds for our economy and industry,” Chris Spear, president and CEO of American Trucking Associations, said in the release. “We do know as long as our economy continues to grow, trucks will continue to move the vast majority of America’s goods, underscoring our industry’s critical role in our country’s future.”