Halfway through a competitive bidding season, the trucking transportation industry saw business rise in March after a lackluster February, but carriers have been securing rates on the low end of expectations, according to analysts.
Trucking rates are flat or have narrowly increased, while “domestic intermodal pricing, which typically lags truckload, appears more competitive,” according to transportation analyst Benjamin Hartford of Baird.
J.B. Hunt Transport Services offered guidance on its profit margins recently, leading analysts to lower short- and long-term expectations on the Lowell-based carrier, which is set to release first-quarter earnings in two weeks. Earnings are expected to fall 6% to 82 cents per share, from 88 cents in the same period in 2016, according to transportation analysts Brad Delco and Justin Long of Stephens Inc. They adjusted their estimates in a research bulletin and a first-quarter earnings preview March 29. (Delco, Long and Stephens provide investment banking services for J.B. Hunt and are compensated accordingly.)
Analysts lowered expectations “as we believe the main takeaway from (first-quarter 2017) results will be the outlook for a more competitive intermodal pricing environment as we see evidence of some (intermodal companies) trying to compete on volumes particularly out on the West Coast.” But J.B. Hunt is expected to be in a better position than its peers “in operating in a more competitive pricing environment, as we have seen them demonstrate in the past,” according to the Stephens bulletin. While the analysts continued to offer a buy rating on the carrier, they reduced its target price by $10 to $105.
The carrier is expected to report earnings of 87 cents per share, based on an average estimate of 20 analysts. Revenue is expected to rise 7% to $1.64 billion. Following are the first-quarter revenue projections by segment, according to Stephens:
• Truckload, $90.9 million;
• Intermodal, $945.1 million;
• Dedicated Contract Services, $387.9 million; and
• Integrated Capacity Solutions, $207.1 million.
The intermodal segment saw the biggest adjustment on expectations, with load volume rising 3.5%, instead of 4.5%, according to Stephens analysts. The segment’s operating ratio is expected to rise 1% to 89.5%. The ratio represents the company’s operating expenses as a percentage of revenue.
“Our sense is West Coast port inbound volumes were more muted after a strong January combined with a competitive (intermodal) pricing industry from a year ago, which is weighing on margins.”
The operating ratio for Dedicated Contract Services is projected to be 89%, an increase of 1.5% from the same period a year ago. The ratio should remain at 96% for the carrier’s brokerage segment, Integrated Capacity Solutions, and would be up 2% from last year. The trucking segment’s ratio looks to be 93.8%, which would be 3.5% worse than the previous year, “as we believe freight fundamentals trended weaker than expectations across the truckload industry in the quarter,” according to the bulletin.
Regarding the carrier’s guidance on profit margins, every 1% change in operating ratio for the carrier’s intermodal segment “affects annual earnings by (21 cents) in our model, so we view the guidance as a (25-cent) EPS headwind to our prior model.”
In an industry note on intermodal pricing, Delco and Long wrote how the “pricing environment has been disappointing” so far this year.
“We think there are still a lot of reasons to like the intermodal market over the next 12+ months…We think most came into this year with increased optimism around broader economic improvements, the potential for truckload capacity to tighten in (the second half of 2017) with the ELD mandate helping the cause and fuel prices to move higher.”
But in the short term a high level of uncertainty remains on when this “positive inflection” will take place.
Shares of J.B. Hunt (NASDAQ: JBHT) closed at $91.75, down 15 cents or 0.16%, on Friday (March 31). In the past 52 weeks, the stock has traded between $102.38 and $75.71.
In the first quarter, spot demand in the brokerage market “remained soft” with “a few geographic pockets of strength,” according to an industry report by transportation analyst Jack Atkins of Stephens. As pockets of strength, he cited “the Southeast which is driven by the beginning of produce season and the recent winter storms across much of the Northeast.”
“We continue to believe the implementation of the ELD mandate in (the fourth quarter of 2017) will be a catalyst to constrain industry capacity, potentially creating a more robust spot market demand environment” by the second half of the year. Spot market rates “have underperformed the five-year trend, and the seasonal uptick in spot market rates in March occurred later in the month this year compared to historical norms.”
Analysts expect “spot market demand trends to remain challenging over the next few months and believe it could be (the second half of 2017) before we see a material increase in spot market demand.”
In the trucking sector, “trends weakened in February as a result of mild weather and excess capacity, before the market improved in March heading into the spring peak season,” according to an industry note by Delco. While declining fuel prices in the first quarter “should serve as a tailwind,” demand was soft. Combining that with rising costs, “we expect weaker earnings results” from the sector. Also, pricing “could setup to be more disappointing than once expected for this year’s bid season.” As a result, Stephens analysts “remains on the sidelines” for the trucking companies they follow.
“We continue to expect pressure from contractual rates from last year’s challenged bid season, the weak used truck market and a rise in insurance premiums, which should serve as headwinds to (first-quarter) results, partially offset by lower fuel costs,” Delco wrote. “That said, we saw stability in the spot market in (the first quarter), with rates flat to up 3% (year-over-year) on average, which we believe was supported by fleet rightsizing and normal spring peak season volumes. We remain cautiously optimistic about freight demand trends given recent PMI data and improvement in inventory trends for retailers in general.”
Trucking stocks that Stephens has followed have “reset” since the post-election increase “as we believe investors feared that some of the main catalysts of the (Trump) administration, particularly a lower corporate tax rate, would be less likely to occur in the near future.” Also, “weaker-than-expected freight trends” likely drove down the stocks, which have fallen 6.3% compared to the first quarter of 2016.
CLASS 8 TRUCK ORDERS RISE
While the used truck market “remains challenged,” Stephens analysts “have heard anecdotally that there are early signs of some stability in the market, with a modest pickup in demand.” Orders of class 8 trucks “have been surprisingly stronger than expectations.” However, expect order cancellations “if freight fundamentals do not strengthen in the next three months.”
But the rise in orders has led to some head scratching for transportation analysts at Stifel. In February, orders of class 8 trucks rose 29%, from the same month in 2016, and led Stifel analyst David Ross to wonder whether mid-sized trucking companies were receiving “special financing deals. Trucking hasn’t been too profitable the last couple of years, which is why I’m scratching my head. And I doubt they’re scrapping a 12- to 15-year-old tractor when buying a new one (more likely selling or trading a 5- to 7-year-old one.”
Stifel analyst Mike Baudendistel said the rise in orders is because of “a return to more seasonal ordering patterns.” Over the past two years, extended backlogs led to more incentive to order early in the season, leading to strong sales between October and December. Orders would decline in January and in the following months.
This year, however, backlogs returned to normal, following some order delays in October and November related to uncertainty with the election. This led to orders declining in the fourth quarter of 2016 and rising in January and February.
“A lot of that is just timing,” Baudendistel said. “But, there also has been definite strengthening, as you would normally expect orders to decline in February from the seasonally-strong January. Since that did not happen this year, confidence appears to still be growing.”
Baudendistel said the rising number of orders will increase the number of used trucks “on the market since most maybe not all, but close to all new trucks come with a trade. We don’t know, though, who is driving the buying.”
In February, sales at the same dealers of used class 8 trucks increased for the second consecutive month, according to ACT Research.
“Total volumes were also higher year-over-year compared to February 2016, and year-to-date relative to the same time period last year,” said Steve Tam, ACT’s vice president.
Auction, retail and wholesale segments of the market contributed to the growth. Also, the average price of used class 8 trucks fell in February, from January, and from February 2016. “We expect pricing to remain at near or current levels throughout 2017,” Tam said.
Since early January, the price of diesel fuel has fallen 2.1% to $2.53 per gallon, according to the U.S. Energy Information Administration.
This should be a “tailwind in a quarter as carriers get reimbursed based on the prior weeks’ published rate, while purchasing fuel at the present ‘lower’ rate,” Delco wrote.
WTI and Brent crude oil prices fell about 10% in the first quarter, “suggesting that bulk fuel purchase rates could have declined at an even faster rate than the retail price of diesel fuel. That said, we do not believe the modest earnings tailwind created by the lower fuel costs is enough to offset the more meaningful inflationary cost headwinds (i.e. driver wage inflation, higher [depreciation & amortization], increased insurance costs) along with the more muted demand and pricing environment.”