J.B. Hunt income falls 8% in the third quarter, revenue rises 9% (Updated)

Third-quarter earnings for J.B. Hunt Transport Services fell 8% as driver wages and recruiting costs increased, rail purchase transportation rates rose and the deal closed to purchase Special Logistics Dedicated.

On Friday (Oct. 13), the Lowell-based carrier, reported earnings fell 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. Earnings missed expectations by 5 cents per share, based on a consensus of 19 analysts.

Revenue rose to $1.843 billion in the quarter as a result of 6% growth in intermodal load volume, 14% increase in revenue producing trucks and improved asset productivity in the dedicated segment and a 17% increase in revenue per load in its brokerage segment. Revenue beat analysts’ expectations by $20 million. The increase was partially offset by a 7% decline in loads in the trucking segment and disruption caused by hurricanes Harvey, Irma and Maria.

Over the past three quarters, earnings have fallen 4% to $300.956 million, or $2.71 per share, from $314.534 million, or $2.77 per share, in the same period in 2016. Revenue has risen 7% to $5.199 billion.

Shares of J.B. Hunt (NASDAQ: JBHT) were down about $2 or 2% in Friday morning trading after closing at $108.35 on Thursday (Oct. 12). In the past 52 weeks, the stock has ranged between $111.98 and $76.20.

SEGMENT PERFORMANCE
• Intermodal
Revenue rose 8% to $1.048 billion, or 57% of the company’s total revenue. Operating income declined 7% to $109.130 million, or 66% of the company’s total operating income.

Impacts on income included cost increases related to inefficiencies because of rail congestion and maintenance and about $1.8 million in costs and inefficiencies in the “dray and rail networks in areas directly affected by natural disasters,” according to a news release.

Revenue per load increased 2% as a result of customer rate changes, freight mix and fuel surcharges. Load volumes rose 2% in the eastern network, while transcontinental loads increased 8%. The hurricanes “limited our ability to handle approximately 5,500 loads in the current period,” according to the release.

Over the past three quarters, revenue was up 6% to $2.986 billion. Operating income was down 3% to $314.105 million. At the end of the third quarter, the segment had about 87,000 containers and trailers and 5,500 dray trucks in the fleet.

• Dedicated
Revenue increased 11% to $437.521 million, or 24% of total revenue. Operating income fell 18% to $42.867 million, or 26% of total operating income.

Income fell as a result of “the timing between increasing driver wages and recovery through customer contracts, increased driver recruiting costs including the length of time to fill open trucks, increased insurance and claims costs, increased salaries and benefit costs, higher equipment ownership costs and approximately $1 million of excess costs associated with operations in the hurricane affected regions compared to the same period in 2016,” according to the release. To purchase Special Logistics Dedicated, the segment spent $3 million in acquisition and $1.5 million in intangible asset amortization costs.

Revenue per truck per week rose 2%. “Increased revenue from better integration of assets between customer accounts and customer rate increases was partially offset by lower productivity at new contracts implemented during the current quarter,” the release noted.

The segment added 1,024 trucks, from the same quarter in 2016. From the purchase of Special Logistics Dedicated, it added 328 trucks. Over the past three quarters, revenue has risen 9% to $1.241 billion. Operating income has fallen 7% to $136.195 million.

• Integrated Capacity Solutions (brokerage)
Revenue was up 15% to $269.451 million, or 14% of total revenue. Operating income fell 14% to $7.291 million, or 4% of total operating income.

Profit margins were flat at 12.8% “as continued compression of gross margins in contractual business offset improvements in spot market gross margins,” according to the release. Technology development costs increased, and the higher number of branches that have been open for less than two years, up to 23, from 15, “more than offset the increased revenue compared to a year ago.” The total number of locations rose to 44, from 40. The segment’s carrier base rose 10% and the number of employees rose 17%.

The segment increased spot market activity, leading to a 17% rise in revenue per load, as load volumes fell 1%. “While continuing to meet our customer commitments, increased spot market activity created a better balance between contractual and spot revenues,” the release showed. Contract volumes were 65% of the segment’s total load volume, or 48% of revenue for the segment. In the same period in 2016, the contract volumes were 75% of load volume, or 64% of revenue.

Over the past three quarters, revenue has increased 13% to $701.335 million. Operating income has fallen 61% to $11.520 million.

• Trucking
Revenue fell 4% to $92.632 million, or 5% of total revenue. Operating income rose 12% to $5.713 million, or 4% of total operating income. Revenue per load rose about 1% because of a 4% increase in rates per loaded mile but was offset by a 3% decrease in haul lengths. Customer contract rates were flat. The number of trucks in operation fell 6% to 2,040 trucks.

Positive changes related to increased rates and lower insurance and claims costs were partially offset by a rise in driver wages and independent contractor costs per mile, and a decline in fleet size and trucks in use. Over the past three quarters, revenue has fallen 3% to $280.895 million. Operating income had declined 29% to $16.216 million.

TRANSPORTATION TRENDS
Hurricanes Harvey and Irma exacerbated an already “tight capacity constrained market” in the truckload sector, according to transportation analyst Justin Long of Stephens.

“This has also helped tighten the domestic intermodal market, and we expect this trend to continue given an optimistic outlook for peak season and the ELD implementation deadline in December 2017. Bottom-line, the set-up for intermodal has improved with 2018 shaping up to be a favorable environment for volume/price increases.” (Stephens provides investment banking services for J.B. Hunt and is compensated accordingly.)

For the week ending Oct. 7, North American intermodal volumes rose 11.6%. Since the start of the year, volumes have risen 4.9%.

Pricing in the truckload sector remains down as “truckers are still cycling through tough comparisons from previous rate reductions,” according to transportation analysts with Stifel. Pricing isn’t the same as revenue per mile but is “what you received yesterday on the same lane for a given unit of freight you are getting quoted today.” (Stifel, which recently upgraded J.B. Hunt stock to buy, from hold, provides investment banking services for J.B. Hunt and is compensated accordingly.)

Capacity reductions related to weak freight demand are expected to end as the market improves. If they can find drivers, large carriers that were decreasing fleet sizes will look to grow. Small carriers have stopped purchasing used trucks while some start to file for bankruptcy. The “previously weak spot market created liquidity problems for some small fleets and independent contractors,” leading to capacity tightening, but the rise in spot market rates might lighten the impact of the ELD mandate as owner-operators “can more readily justify costs,” according to Stifel.

With President Donald Trump slow to appoint regulators, the regulations agenda remained a point of uncertainty; however, federal regulations have led to a reduction in capacity. Compliance, Safety and Accountability (CSA) standards have reduced the number of experienced drivers as “ample confusion and inconsistences persist throughout the industry.”

The hours-of-service rule changes went into effect July 1, 2013, and the restart provision requiring a two-night rest period was suspended Jan. 1, 2015. The ELD mandate will go into effect in December, with out-of-service penalties starting April 2018. According to Stifel, nearly one-third of drivers “potentially falsify logs.” By late 2018, speed limiters are expected to be “fully implemented.” Other regulations in the works include revised drug testing procedures, medical certification processes, sleep apnea testing, and a drug and alcohol database.

By the end of 2017, the reduction in capacity should support mid-single-digit rate increases, if the economy continues to grow at a rate of at least 1.5% to 2% annually. The collaboration between shippers and carriers is expected to improve after it had fallen away because of the “loose supply/demand dynamics.” As spot market rates have risen 15%, from last year, and irregular route truckload carriers have “taken 5% and 10%+ in current rate negotiations,” shippers are expected to “develop deeper relationships” with carriers.

For general contract and dedicated rates, they are expected to rise between 5% and 10% in the second half of 2017, from the same period in 2016.

Trucking equipment prices are rising as a result of materials costs and regulatory compliance costs increases. New engines are more fuel efficient, and late model engines are more reliable and more maintainable; however, the technician shortage continues. The low price of used equipment has pushed up equipment ownership costs for large fleets.

Orders of trailers rose 78% to 22,900 in September, from the same month in 2016, according to ACT Research. September orders were up 46% from August, a month in which orders had eased slightly.

“While dry vans, reefers and flatbeds all posted solid month-over-month gains, dry vans provided the majority of the support for September’s overall industry performance,” said Frank Maly, director of commercial vehicle transportation analysis and research for ACT. “Last September was a disappointing month, as pre-election uncertainties generated significant market headwinds that did not clear until later last November.”

Fleets continued to invest amid concerns of the potential impact of the upcoming greenhouse gas regulations. Through the first three quarters of the year, trailer orders have risen more than 40% to over 190,000 trailers, from the same period in 2016, Maly said.

“Resulting order backlogs now push the industry solidly into the first quarter of next year.”