J.B. Hunt’s earnings fall, stock price rises

by Jeff Della Rosa ([email protected]) 167 views 

Shares of J.B. Hunt Transport Services rose nearly 2% after the carrier reported second-quarter earnings declined 6% and issued lowered 2017 expectations Monday (July 17).

“A combination of low expectations and likely short covering appear to have been sufficient to push the stock up,” said Allison Landry, trucking analyst for Credit Suisse. (Landry and Credit Suisse provide investment banking services for J.B. Hunt and are compensated accordingly.)

But as of mid-day Tuesday (July 18), the stock had since lost the ground it gained the day before. Meanwhile, truck tonnage rose 1.3% in June, and some U.S. legislators want to delay the start of the electronic logging device mandate.

On Monday, J.B. Hunt reported earnings fell to $97.9 million, or 88 cents per share, in the second quarter that ended June 30, from $105 million, or 92 cents per share, in the same period in 2016. The Lowell-based carrier missed earnings and revenue expectations. Revenue rose 7% to $1.73 billion.

The company also updated its 2017 expectations “that came in better than feared, in our view,” according to analysts Brad Delco and Justin Long of Stephens. (Delco, Long and Stephens provide investment banking services for J.B. Hunt and are compensated accordingly.)

J.B. Hunt “posted better-than-expected intermodal results that seemed to support demand accelerating through the quarter; however, those results were more than offset by margin pressure” in the carrier’s brokerage segment. Margin pressure in the segment is a “clear sign of supply/demand dynamics tightening in (trucking) which is typically a good leading indicator for contract rates to move higher in the future, along with (intermodal) rates.”

In the intermodal segment, the company expects revenue to rise 5% to $4 billion in 2017.

In Dedicated Contract Services, Delco and Long expect revenue to rise 8.5% to $1.66 billion for 2017. This is $10 million more than J.B. Hunt’s upper range of revenue expectations for the year. Also, it expects about 400 tractors to be added to the fleet as opposed to J.B. Hunt’s expectations of between 600 and 800 trucks. “Our sense is that bid activity in the dedicated market remains strong, and we expect (J.B. Hunt) to continue to grow this segment in the near and longer term.”

In the brokerage segment, revenue should rise 12.1% to $954.6 million in 2017, from 2016, according to Delco and Long. This is on the low end of the company’s expectations of between $950 million and $1.1 billion.

In the truck segment, revenue should fall slightly to $387.1 million in 2017, and is also at the low end of the company’s guidance of between $370 million and $390 million. “Our revenue assumption is driven off flattish rates combined with flat utilization,” according to Delco and Long.

Shares of J.B. Hunt (NASDAQ: JBHT) were trading at $91.85, down $1.68 or 1.8% as of Tuesday afternoon. In the past 52 weeks, the stock has traded between $102.38 and $76.20.

On Tuesday, the American Trucking Associations’ seasonally adjusted For-Hire Truck Tonnage Index rose 1.3% in June, compared to the same month in 2016. In May, the index rose 5.2%. So far through 2017, the index is up 1%.

However, the tonnage index fell 4.3% in June, from May. Tonnage rose 6.9% in May, from April.

“After such a large spike in May, it was not surprising to see the index give back some of those gains in June,” said ATA Chief Economist Bob Costello. “However, looking back at the second quarter as a whole, tonnage was up 0.8% over the first quarter and 1.9% over the same quarter last year, so it was a solid three month period.”

“June’s slide does not change my belief that we will continue to see moderate, albeit at times choppy growth in truck tonnage as the year continues,” he said.

Trucking demand was strong until the end of the second quarter, according to Stifel analysts. “The big surge in freight during the May/June time frame of this year can be attributed to a few factors: the drawdown in inventories over the past few months, the bumper crop of produce coming out late in California, the cool/wet spring in the Northeast that delayed the late spring/early summer surge of pool furniture, gas grills, fertilizer, etc., the ongoing driver shortage issues, (and) the run up in the life cycle equipment ownership costs.”

Rail carload data was strong in commodities and intermodal carloads, according to Stifel. For the week of July 2-8, intermodal carloads rose 3.9%, compared to the same week in 2016.

On Monday, Republicans in the U.S. House of Representatives asked the Federal Motor Carrier Safety Administration to consider delaying the mandate requiring electronic logging devices, but Delco expects it will go into effect on Dec. 18 as planned.

The House Appropriations Subcommittee on Transportation, Housing & Urban Development issued a report “on the regulatory compliance burdens on small carriers” that included the request and was accompanied by the proposed budget for fiscal year 2018.

“Don’t freak out. It’s just a consideration to delay,” he said. The subcommittee asked if a delay would be appropriate, and if so, what could the Department of Transportation do to “provide temporary regulatory relief until all ELD implementation challenges can be resolved,” according to the report. The FMCSA would be required to respond within 60 days of the approval of the legislation.

In the report, legislators say the ELD mandate will cost $2 billion to implement. “We find this number to be overstated,” Delco said. “With today’s technology, the costs of ELDs have been reduced considerably.” The average cost for an ELD is about $495 per truck annually, according to the FMCSA.

“Additionally, we believe that the benefits of ELDs could ultimately outweigh the costs,” Delco said. “One example of this would be the time spent on paperwork alone.” Drivers are expected to save about 20 hours per year on paperwork, according to the FMCSA. By spending those 20 hours behind the wheel instead of doing paperwork, this would result in a savings of about $1,960 annually, based on the current rate of $1.96 per mile and a truck moving at 50 mph.

“When looking at the operational costs of operating a trucking business as a whole, the cost of an ELD is a drop in the bucket when compared to the cost of fuel, equipment and insurance,” Delco said.

The report also addressed the potential burden the mandate would have on small carriers, and how they would bear the costs without a benefit to their bottom line. But Delco explained this is an overstated argument. “It is our view that with all carriers strictly abiding by the same rules and thus on a level playing field without the ability to falsify logbooks, this should result in a more rational pricing environment.”

Rates will improve as existing trucks that are running illegally either must come into compliance or leave the industry. Capacity is expected to decline between 3% and 7%, and driver pay should rise, he said. “Ultimately, we believe this is a win-win for both larger and small carriers alike.” The mandate will also increase “safety on our roads as current Hours of Service rules will be more easily and effectively enforced.”

The impact of the ELD mandate is likened to how the driver shortage is impacting the industry, according to Landry of Credit Suisse. “With the U.S. close to full employment, it is becoming increasingly difficult to attract and retain drivers — which (J.B.) Hunt believes is serving as a catalyst for tightening capacity. In fact, the company thinks this is having an outsized impact relative to ELDs.”

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