Share prices fell for J.B. Hunt Transport Services and ArcBest as trucking/transportation analyst Jason Seidl of Cowen and Co. lowered stock ratings for the companies to hold, from buy. He doubled the earnings per share estimate for USA Truck to 80 cents per share for 2018 and maintained its buy rating.
In an industry update, “Pulling The Punch Bowl Before The Party Starts,” Seidel said the improvements in the trucking industry have already been factored into J.B. Hunt’s and ArcBest’s stock prices.
“We see the current valuation multiples for these stocks as largely fair or at the high end.”
For Lowell-based carrier J.B. Hunt, its share price started falling Friday (Oct. 13) after missing analysts’ expectations by 5 cents per share when it reported third-quarter earnings declined 8% to $100.385 million, or 91 cents per share, in the quarter that ended Sept. 30, from $109.425 million, or 97 cents per share, in the same period in 2016. The carrier noted its costs increased, including driver wages and recruiting costs and rail purchase transportation rates.
J.B. Hunt can expect driver wages to put pressure on margins until contract rate increases go into effect in 2018, according to Brad Delco, transportation analyst for Stephens Inc. Delco maintained a buy rating for J.B. Hunt shares.
“While we acknowledge that JBHT has a few quarters before the benefit from the rate increases in this cycle, we believe management has proven its ability to capitalize on a tightening freight environment to drive earnings growth,” Delco said. “We continue to believe we are in the early stages of the inflection in the freight cycle and see JBHT as a core transportation holding with many levers to pull to take advantage of the current dynamics in the industry.”
Trucking industry demand started to increase “organically in early/midsummer, and by late summer it was flirting with 2014 levels,” Seidl said. “Demand and rate strength appears to have exceeded 2014 levels in recent weeks.”
The recent improvement can be attributed to hurricanes Harvey and Irma and as a result of freight being shifted from railroad company CSX because of service issues, which started in the spring, Seidl said. Rebuilding efforts related to the hurricanes should increase demand modestly but steadily, “playing out over the next couple of years and nowhere near the magnitude of the immediate post-storm benefit.”
J.B. Hunt’s truckload and brokerage segments performed the best in the third quarter, according to Delco.
“Trucking benefited by a tight and strong freight environment which drove better pricing than we expected, but partially offset by an unseated truck issue more so than expected.” The brokerage segment, Integrated Capacity Solutions, “benefited from a strong surge in spot prices which helped offset margin compression on contractual/committed loads.” In 2018, the brokerage segment’s revenue is expected to rise 15% to $1.1 billion. Gross margins are expected to remain flat at 12.7%.
J.B. Hunt was “shockingly…able to keep its brokerage gross margin flat (year-over-year) at 12.8%,” Seidl said. “That speaks to the very strong margin performance from the spot portion of the business because the contractual portion was significantly squeezed.”
In 2018, the company’s truckload segment should see revenue rise 8.1% to $352 million, according to Delco. The increase is expected to be driven by a 4.7% increase in rates and a 2.2% increase in tractor use.
SHARE PRICE MOVES
Along with changing J.B. Hunt’s stock rating, Seidl also reduced its target share price to $101, from $102. Delco’s target share price is $115. On Oct. 2, the stock price hit a 52-week high of $111.98, and has since fallen 9% to close at $101.64 on Monday (Oct. 16). The lowest the stock has traded at over the past 52 weeks was $76.20.
For Fort Smith-based ArcBest, the parent company of less-than-truckload carrier ABF Freight, its 2017 earnings per share estimate was reduced 10 cents to $1.25 “to reflect the company’s tonnage and revenue (per hundredweight) update and other adjustments,” according to Seidl.
“Our 2017 estimates already reflect 6% improvement in revenue (per hundredweight) and another modest improvement in 2018.”
On Oct. 3, ArcBest’s stock was trading at a 52-week high of $34.25 and has since fallen nearly 10% to close at $30.85 on Monday. The lowest the stock has traded at over the past 52 weeks was $16.95.
For Van Buren-based USA Truck, the change in the 2018 earnings estimate is a reflection of “increased confidence in the company’s ability to deliver on its operational improvement plan amid improving freight conditions,” Seidl said. The target stock price was increased to $16, from $10.
On Oct. 2, USA Truck’s shares were trading at a 52-week high of $14.89, and have since fallen 7% to close at $13.76 on Monday. The lowest the stock has traded at over the past 52 weeks was $5.73.
The number of trucks and trailers on the road (capacity) is expected to be reduced between 3% and 5% as a result of the electronic logging devices (ELD) mandate, which will go into effect in December. However, capacity won’t be reduced by that amount until the second half of 2018.
“Meaningful enforcement is unlikely to begin until April 1, 2018, when non-compliant carriers will be forced out of service for eight hours,” Seidl said. “Therefore, either the enforcement will need to get tougher or the mandate’s full impact is unlikely to be felt before mid to late 2018 as non-compliant carriers are either repeatedly penalized or are taken out of service completely (potentially on their own accord if frustration levels are high enough).”
“During this time period, carriers that were late to adopt ELDs will be in the midst of reconfiguring their networks to keep drivers moving, getting paid and happy,” he said. “As much as this is a trucking company’s market, it’s even more so a truck driver’s market.”
Salaries and benefits comprise of about 30% of revenue for trucking companies, Seidl said. About 25% of rate increases are given to drivers, but in 2018, as much as or possibly more than 50% of rate increases are expected to be dedicated to drivers.
“That would mean driver pay could easily increase in the 5% to 7.5% range, taking total operating expense up (about) 2%.”
Some carriers have said they were unable to “hire dedicated drivers at a guaranteed $75,000 salary (average driver pay is just over $50,000 for the industry.)” A CEO of a private carrier said pay might have to rise above the “six-figure range to adequately attract enough drivers.”
In J.B. Hunt’s dedicated segment, driver pay hikes before contract rate increases and new contract startup costs “were the main drivers” for its miss in earnings for the segment. “However, cost pressures seem more timing related and will likely fade over the next few quarters,” according to Delco. In 2018, segment revenue is expected to rise 11.8% to $1.9 billion, “driven by +7.2% fleet growth combined with +4.2% revenue per tractor growth.”
FINAL MILE UPSIDE
Over the medium to long term, a potential upside for J.B. Hunt is its final mile business, which accounts for about $250 million in revenue annually, Seidl said.
“The company’s recent acquisition of Special Logistics Dedicated shows JBHT’s commitment and focus on the most highly levered segment of the freight economy to e-commerce.”
Amazon’s Seller Flex service might be an opportunity for J.B. Hunt “to further expand its last mile presence with the most dominant player in the e-commerce market.”
J.B. Hunt has the second largest final-mile delivery fleet for heavy goods of more than 150 pounds in the country, behind XPO Logistics, according to Seidl. In 2016, XPO generated more than $800 million in revenue through independent contractors and has more than 13 million final-mile deliveries annually. In 2016, XPO’s final-mile revenue is expected to rise 16% to $960 million.