Outlook improves for national trucking industry but 4Q concerns remain

The outlook for the trucking industry is improving, but some headwinds remain just two weeks before J.B. Hunt Transport Services is slated to release fourth-quarter earnings, analysts said.

Lowell-based carrier J.B. Hunt is expected to report fourth-quarter earnings of a 99 cents per share, which is 2 cents less than Wall Street’s expectations, according to a research bulletin from Stephens Inc. transportation analysts Brad Delco and Justin Long. The Stephens analysts expect better pricing in two segments of the company — intermodal and trucking — and also believe it’s in a better position to overcome “a looming driver shortage/wage inflation issue.” As a result, they maintain their buy rating for the stock, and increased the target stock price outlook by 17% to $115, from $98. Earnings are projected to fall 3.4% to $112.8 million, and revenue is expected to rise 7.3% to $1.74 billion for the quarter that ended Dec. 31.

According to a separate industry note from Stephens transportation analyst Jack Atkins, trucking brokerage companies can expect a favorable fiscal 2017, especially in the second half of the year as the federal mandate (ELD) goes into effect requiring drivers to track hours of service with electronic logs. It will be a “catalyst to constrain industry capacity, potentially creating a more robust spot market demand environment” as soon as the second half of the year. Atkins expects “contractual rate increases” in the 2017 bid season as a result of the mandate and “the potential for significant driver wage inflation.”

Trucking companies saw the “freight environment” improve in the fourth quarter of 2016, with a “more robust peak season that developed later than expected,” according to a separate industry note from Delco on trucking. The industry experienced “strong trends” in late November and into the December peak after a “slow start in October” and modest improvement in November. The trends were encouraging but were largely brought on by “seasonal factors.” Some headwinds to the industry include challenges in pricing from the bid season in the past year, “a weak used truck market and higher fuel costs.” As a result, Delco expects “slightly weaker” fourth-quarter earnings from trucking companies.

Complicating matters for the trucking industry is that orders for Class 8 trucks have slowed over the past year “as truckload capacity has been abundant,” Long wrote in a separate industry note. Truck orders are expected to fall 12% in 2017, after declining 30% in 2016. And, uncertainty remains on whether the Trump administration’s plans, which could favorably impact the industry, will take shape. Plans include a lower corporate tax rate and higher infrastructure and energy spending.

Meanwhile, companies have been cutting costs and working to improve productivity as the transportation industry has been battling a “freight recession over the past two years.”

In the intermodal segment of the industry, volumes fell 1.7% in 2016, but analysts expect to see low- to mid-single digit growth over the next year. Intermodal tailwinds include trucking pricing and demand might be bottoming out, capacity could be constrained because of the ELD mandate, the truck driver shortage could get worse and increasing fuel prices.

“After a year where we saw rail-to-truck conversions, it feels like the pendulum could start to swing back in the other direction,” Long wrote. “Weakness in international volumes remained a headwind throughout the year from a strong U.S. dollar and elevated retail inventory levels.”

Intermodal fared better in the United States but was “still muted due to loose truckload capacity.” The intermodal segment of J.B. Hunt’s business, which accounted for 67% of the carrier’s operating income in fiscal 2015, saw operating income fall 7% to $116.9 million in the third quarter. Revenue for the intermodal segment is expected to rise 3% to $998.6 million in the fourth quarter, according to Stephens analysts. The carrier recently requested a third-party review of how revenue is divided with BNSF Railway under a joint service agreement, but analysts don’t foresee a “material impact on financial results or operations” even though a similar review hasn’t been completed in more than 10 years.

In other good news in the industry, less-than-truckload carriers like Fort Smith-based ArcBest Corp., have “benefited from several catalysts” in the fourth quarter, Delco wrote. Highlights included “rational” pricing, rate increases, “relatively stable demand,” fuel price rises and four consecutive months of expansion in recent ISM reports.