J.B. Hunt Transport Services net income rose 30.6% and revenue increased 19.9% in the third quarter but missed analyst expectations as customer rate increases were partially offset by increases in driver wages and recruiting costs, startup costs for new dedicated contracts and rail purchase transportation.
After the markets closed Monday (Oct. 15), the Lowell-based carrier reported earnings for the quarter that ended Sept. 30 were $131.11 million, or $1.19 per share, up from $100.385 million, or 91 cents per share. Revenue was $2.21 billion. J.B. Hunt missed analysts’ expectations for earnings by 20 cents per share and revenue by $10 million.
Between January and September, earnings rose 33.2% to $400.904 million, or $3.63 per share, and revenue increased 21.1% to $6.297 billion, from the same period in 2017.
Last week, the carrier announced legal payments would affect earnings for the period by $28.9 million, or 26 cents per share. Since then, analysts reduced earnings estimates by 3 cents to $1.39 per share, based on a consensus of 22 analysts. The revenue estimate was unchanged and was projected to rise 20.4% to $2.22 billion.
In the third quarter, J.B. Hunt paid several pre-tax expenses totaling $39 million. The charges related to an arbitration between the company and Fort Worth, Texas-based BNSF Railway Co., lawsuit settlements regarding driver pay and rest breaks and a customer bankruptcy.
In a conference call, CFO David Mee said the bankruptcy regarded a costumer that competed with dollar stores and had expanded into the northeast, and J.B. Hunt grew with the company. When asked if J.B. Hunt would be impacted by the Sears bankruptcy announced today, Mee said the carrier has“virtually no exposure to that one.”
Other expenses that impacted earnings included increased technology spending on new applications and existing operating systems and third-party drayage costs. Drayage refers to the truck transportation of goods to and from intermodal facilities. The carrier had a 20.4% tax rate for the quarter, down from 35.9% in the same period in 2017, and it expects the 2018 tax rate to be 24%.
Shares of J.B. Hunt (NASDAQ: JBHT) closed Monday at $111.53, up $2.24 or 2.05% in heavy trading. In the past 52 weeks, the stock has ranged between $131.74 and $100.25.
Revenue for the segment, the company’s largest by revenue and operating income, rose 16.2% to $1.218 billion, or 55% of the company’s revenue. Operating income increased 10.3% to $120.319 million as increases in customer rates were partially offset by cost increases to attract and retain drivers, inefficiencies related to rail congestion and additional third-party drayage expense. The income represented 69% of the company’s operating income in the period.
Total loads rose less than 1% to 519,974, and revenue per load rose 15.4% to $2,343 as a result of changes in customer rates, freight mix and fuel surcharges. Load growth increased 9.5% in the East, while transcontinental loads fell 5%. The carrier had five major derailments in its national intermodal network, and Hurricane Florence impacted its ability to handle 4,000 loads. The segment has 93,000 units of trailers and intermodal containers and 5,600 trucks.
In the company’s earnings call, Shelley Simpson, president of highway services and chief commercial officer, said the company plans to integrate the intermodal segment’s drayage business into the carrier’s transportation software J.B. Hunt 360 in mid-2019.
“Any carriers that we do dray with, which will be about 15% or so of our shipments, will be contracting through our 360 platform,” Simpson said.
In a recent report on the company, analyst Brandon Oglenski of Barclays was concerned about slower expansion in the intermodal segment, and this could impact the carrier’s value as the other business segments grow.
When asked about a possible shift from investing away from intermodal and into other business segments and its technology platform, President and CEO John Roberts said “I wouldn’t say it’s any less focused on intermodal as much as increased focus on building the platforms and connection that we need to reach more people and to better automate what we’re doing and how quickly we’re doing it and how efficiently we’re doing it. I think we’re really seeing all of the businesses connect through the investments that we’re making. Probably finding some…places that we can connect better than we’re doing today. It’s not a de-emphasis on any part of the business. We’ve always held ourselves to a very high standard of return, and I think so far we’ve been pretty true to that.”
DEDICATED CONTRACT SERVICES
Revenue rose 24.1% to $542.884 million, and operating income fell 18.4% to $34.99 million as a result of pre-announced charges related to insurance and claims costs, nearly $4 million in startup costs for new contracts, rising costs in the Final Mile Services network and a 10% increase in driver pay and recruiting costs.
Mee attributed to the segment some of the nearly $800 million in the carrier’s expected capital expenditures for 2018. The number of trucks increased 15% to 9,657, and revenue per truck per week, or productivity, rose 7% to $4,504, as a result of “customer rate increases, improved integration of assets between customer accounts and increased customer supply chain fluidity,” according to the company.
As part of the dedicated segment, Final Mile Services revenue rose by $23 million, from the same period in 2017.
From the second quarter, the segment added 598 trucks, among the trucks added, 42% were from private fleet conversions, and 5% is related to Final Mile Services. Customer retention rates are more than 98%.
INTEGRATED CAPACITY SOLUTIONS
Revenue in the carrier’s brokerage segment rose 28.3% to $345.83 million, and operating income increased 40.1% to $10.216 million as a result of an increased gross profit margin percentage and improved operations at branches that have been open for at least two years.
Gross profit margin rose 270 basis points to 15.5% but was partially offset by $2.2 million of the pre-announced charge related to a customer bankruptcy, higher personnel costs and increased spending on Marketplace, which is a part of the company’s J.B. Hunt 360 system that matches freight to capacity using data and artificial intelligence. Load volume increased 41%, and revenue per load fell 9% as a result of an increased mix of less-than-truckload contract loads. Contract loads represent about 72% of load volume and 49% of total revenue, compared to 65% and 48%, respectively in the same period in 2017.
Nearly $151 million of the segment’s total revenue could be attributed to Marketplace. In the second quarter, $137 million could be attributed to the Marketplace. Total location count decreased by one to 43 as two locations were consolidated. The carrier base increased 26% to 69,000, and the number of employees increased 26% to 1,137.
Revenue increased 14.1% to $105.685 million, and operating income rose 61.4% to $9.218 million as rates per mile rose 19% and lower equipment costs were partially offset by increased driver pay and independent contractor costs. Simpson said wages have risen in the double digits. The number of trucks in the segment fell 3.3% to 1,972 trucks.
Hiring in the trucking industry increased for the fifth consecutive month, up 4,900 jobs in September, from August, according to the U.S. Bureau of Labor Statistics. The number of employees in the industry rose 2.3% to 1.488 million in September, from the same month in 2017.