J.B. Hunt’s net income falls 6% as costs rise and rates decline (Updated)

Intermodal load growth and a rise in revenue producing trucks weren’t enough for J.B. Hunt Transport Services to offset higher costs and lower rates in the second quarter. Income fell 6% as a result of lower shipper rates, increases in rail and over the road transportation costs, start-up costs related to new contracts in its dedicated segment, higher driver pay and recruiting costs.

On Monday (July 17), Lowell-based carrier 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 company missed earnings expectations by 4 cents, based on a consensus of 20 analysts. http://www.jbhunt.com/

Revenue rose 7% to $1.73 billion, from $1.62 billion in 2016. Revenue was expected to rise to $1.74 billion, based on a consensus of 15 analysts. Load volume rose 5% in the intermodal segment, which accounted for 67% of the company’s operating income in the second quarter. The number of revenue producing trucks also rose 5% in the company’s Dedicated Contract Services segment, and volume in its brokerage division increased 20%.

Following are the results by segment.
• Intermodal
Operating income rose 4% to $110 million. Revenue rose 7% to $1 billion. Revenue per load increased 2%. The number of transcontinental loads increased 10%, but volumes in its eastern network declined 2%.

• Dedicated Contract Services (DCS)
  Operating income fell 4% to $49 million. Revenue rose 8% to $412 million. Revenue per truck per week rose 2%.
• Integrated Capacity Solutions (ICS)
  The company’s brokerage division reported a $200,000 loss. Revenue rose 9% to $222 million. The percentage of loads based on contracts rose to 73%, from 72% in the same period in 2016, while the percentage of total segment revenue from the contracts fell to 58%, from 65% in the same period last year. Gross profit margins declined to 11.6%, from 15% in the same period last year.

Total number of branches rose to 42, from 35. The number of employees increased 21%, and the number of carriers rose 9%.

• Truck (JBT)
  Operating income fell 37% to $5.6 million. Revenue declined 4% to $95 million. Rate per loaded mile, excluding fuel surcharges, rose 0.9% “primarily from customer driven freight mix changes, including a 6.3% decrease in length of haul,” according to the company. The segment had 2,072 tractors at the end of the second quarter, down from 2,186 at the time in 2016.

REVISED EXPECTATIONS
The company also revised its 2017 financial expectations.

In intermodal, it decreased revenue per load between $13 and $17. Revenue per load was increased $20 in the first half, and decreased $10 in the second half.

In its dedicated segment, it increased its truck count to between 600 and 800, from between 500 and 700.

In brokerage, it increased its investment into technology from $15 million to between $15 million and $17 million. It reduced its branches to 43 and operating margin to between 1% and 3%.

In trucking, it reduced its revenue to between $370 million and $390 million, from $410 million and $430 million, and decreased the truck count by 50 to 100 and operating margin to between 5% and 6%.

Total capital expenditures was decreased $6 million to $471 million. Total growth was reduced to $193 million, from $219 million, by decreasing the number of containers to between 4,000 and 5,000 and the number of chassis to between 3,000 and 4,000. Technology expenses were increased $20 million to $77 million.

Shares of J.B. Hunt (NASDAQ: JBHT) closed Monday at $93.53, up $1.68 or 1.83% on Monday. In the past 52 weeks, the stock has traded between $102.38 and $76.20.

SECTOR TRENDS
In June, rail demand rose for the second consecutive month, according to transportation analyst Brandon Oglenski of Barclays. For June, the rise was largely driven by coal demand, but intermodal demand also “maintained its recently elevated run rate.” For 2017, rail volume is expected to rise 5% or more.

“The second quarter inflected positively for the large U.S. freight trucking market, with spot rates improving materially, signaling a long awaited equilibrium in supply and demand,” Oglenski said.

Over the past quarter, the average rate for dry-van freight has risen from 2% to 11%, compared to rates in the same period in 2016, according to DAT Solutions. https://www.dat.com/

“Marked improvement in non-fuel ‘spot’ rates over the last few months, particularly relative to weaker seasonal patterns observed in 2015 and 2016, is an encouraging sign that freight market capacity has finally right-sized,” Oglenski said. “Stronger transactional pricing will take time to make its way into contractual pricing and ultimately earnings, but the narrowing spread between ‘spot’ and contract rates seen in June bodes well for carrier rate negotiations heading into 2018.”

In May, the Cass Freight Index for shipments rose 7.1%, from the same month in 2016. The expenditures index, which represents the total amount spend on freight, rose 7.4% in May.

American Trucking Associations’ seasonally adjusted For-Hire Truck Tonnage Index rose 4.8% in May, compared to the same month in 2016. It was the largest year-over-year gain since November. ATA Chief Economist Bob Costello expects tonnage to increase moderately “as key sectors of the economy continue to improve slowly.”