J.B. Hunt earnings per share expected to rise 45.5%, revenue to jump 18.4%

Lowell-based carrier J.B. Hunt Transport Services is expected to report second-quarter earnings will rise 45.5% to $1.28 per share, from the same period in 2017, according to a consensus of 22 analysts. On Monday (July 16), J.B. Hunt plans to release earnings for the quarter ending June 30.

Revenue is projected to rise 18.4% to $2.05 billion, according to a consensus of 20 analysts.

In a second-quarter preview, analysts Brad Delco and Justin Long and associates Scott Schoenhaus and Brian Colley, all of Little Rock-based Stephens Inc., increased the carrier’s 12-month target price by $5 to $138.

“We are positively adjusting our estimates given our belief that (J.B. Hunt) has benefited from a robust intermodal pricing environment, strong trucking/dedicated demand and a modest improvement in rail service,” according to the Stephens analysts, who increased earnings estimates by 8 cents to $1.30 for the second quarter.

On April 16, the carrier reported declined use in the intermodal network impacted first-quarter earnings for the period that ended March 31. Net income rose 15% to $118.142 million, or $1.07 per share, but earnings missed estimates by 1 cent.

J.B. Hunt’s intermodal segment accounted for 68% of the company’s operating income in the first quarter. Reduced use and efficiency from third-party drayage as a result of rail congestion, a tight third-party drayage market and increased costs to install and integrate tracking technology for trailers and containers partially offset load volume growth, customer rate increases and freight mix. Drayage refers to the trucks that transport intermodal containers and trailers to and from railroads.

But in the second quarter, intermodal service demand was strong, according to Delco, Long, Schoenhaus and Colley. Shippers are looking to intermodal capacity to ship goods in tight truckload market and to plan for peak shipping season. Margins in the J.B. Hunt intermodal segment are expected to improve 80 basis points, from the first quarter, and this is consistent with the historical average. The analysts previously expected a margin improvement of 30 basis points.

The carrier should achieve this margin improvement as a result of strong intermodal pricing and slightly improved rail service, they said. The analysts lowered volume growth by 50 basis points to 5.5% as a result of tight rail capacity, which has slowed growth. In June, intermodal volume on U.S. railroads rose 6.3% to 1.16 million containers and trailers, from the same month in 2017, according to the Association of American Railroads. Over the first six months of 2018, U.S. intermodal volume has risen 6% to 7.154 million loads, from the same period in 2017.

“Record intermodal volume for June speaks to the high value proposition that rail customers associate with intermodal service,” said John Gray, senior vice president of policy and economics for Association of American Railroads. “For now, things are looking good for the railroads and the economy despite the many threats, such as a potential trade war, that could bring change quickly.”

In the most recent Cass Freight Index report released in mid-June, the Cass Freight Shipments and Expenditures indices showed that the U.S. economy was “ignoring all of the angst coming out of Washington, D.C., about the potential of a trade war and all of the concerns coming out of Wall Street about the increased threat of inflation or the rise in interest rates.”

In May, the shipments index rose 11.9%, and the expenditures index rose 17.3%. Demand was exceeding capacity in most modes of transportation, and pricing power in the modes have led to talk about inflation impacting the U.S. economy. But Donald Broughton, analyst for Broughton Capital LLC and commentator for the Cass indexes, was not afraid of long-term inflationary pressure as technology allows for ways to improve asset use and price discovery in all areas of the economy, especially in transportation.

Also in May, the Cass Intermodal Price Index rose to 141.1, just below the record high of 143.2 set in March. Intermodal pricing rose 9.1%, from the same month in 2017. Tight truckload capacity and higher fuel prices have led to increased demand and improved pricing for the intermodal sector, according to Broughton.

J.B. Hunt’s Dedicated Contract Services segment, which accounted for 24% of the carrier’s operating income in the first quarter, is continuing to see strong demand, and revenue in the segment is expected to rise similarly to the first quarter, according to Delco, Long, Schoenhaus and Colley. Revenue rose 26% to $494.480 million in the period.

First-quarter pressures on margins look to be in the past, and second-quarter margins should rise 260 basis points, from the first quarter, and better than the historical average of 170 basis points.

Integrated Capacity Solutions, or the carrier’s brokerage segment, is expected to show a strong performance amid a tight truckload market and strong spot market, according to Delco, Long, Schoenhaus and Colley. Net revenue margins should outperform historical trends after first-quarter purchased transportation costs were higher than normal and more adjustments to contracts are expected to offset increased purchased transportation costs. Net revenue margins should deteriorate 40 basis points, compared to the historical average of 80 basis points.

Margins in the carrier’s trucking segment are expected to rise, but the difficult driver market and unused trucks will put pressure use and costs, according to Delco, Long, Schoenhaus and Colley. The company’s operating ratio is projected to improve 200 basis points, from the first quarter, and is consistent with the historical average.

Operating ratio is a company’s operating expenses as a percentage of revenue. But the analysts said it’s difficult to estimate revenue, fleet size and use rate, based on the existing driver market.

Higher fuel prices will lead to increased revenue for the carrier, but also could impact margins. “Said another way, since fuel is essentially a pass through expense, it does not hurt earnings performance but can dilute margins,” the analysts said.

Shares of J.B. Hunt were trading at $121.52, down $2.69 or 2.17% Wednesday afternoon (July 11). In the past 52 weeks, the stock has ranged between $131.74 and $88.83.