J.B. Hunt intermodal customers not pre-ordering freight to beat tariffs; Fed expected to cut rates, economist says

An executive of Lowell-based carrier J.B. Hunt Transport Services recently said intermodal customers are neither pulling forward freight ahead of tariffs nor concerned about tight capacity going into the fourth quarter. Meanwhile, a transportation economist expects the Fed to lower federal funds rates two more times this year.

At a recent analyst conference, Darren Field, executive vice president of intermodal, and Brad Delco, vice president of finance and investor relations, both of J.B. Hunt, discussed the freight market leading into peak season. Field noted that freight volumes between the fourth quarter of 2018 and the first half of 2019 have not been great, but in the second quarter, the market reached “a new normal.” Freight volumes started to improve in May and June, and volumes in July and August have met expectations.

“We have customers all telling us that they expect to have a peak season,” Field said. “They do believe that they’re going to have extra demand. And so that part of our plan feels pretty good.” However, customers aren’t saying they have a special project or that they are concerned about capacity in the peak season.

“So in a tighter truck environment, we would have that kind of activity, and we don’t have that going on,” Field said. “So more than anything, feeling like our customers are trying to get closer to doing what we’ve all planned to do. And overall, economy’s not great, but maybe it’s kind of bumped up on the bottom and now things will sort of feel maybe more normal as we move forward.”

In a recent webinar, economist Sam Kahan of ACT Research, expects the Federal Reserve to cut the federal funds rates in mid-September by 25 basis points to 1.88% and another cut of 25 basis points in either the Fed’s October or December meetings, resulting in a rate near 1.5%.

Kahan said he doesn’t expect an economic recession, but a slowing in the expansion of the economy. GDP growth is expected to slow to 2.3% in 2019 and moderate to 1.7% for 2020 and 2021, according to ACT Research.

“It’s pretty well established that we had a mild freight recession in 2019,” said Tim Denoyer, vice president and senior analyst for ACT Research. “Almost every key measure of the freight market dropped pretty materially from late 2018 until recently. We see trade policy as a primary driver as it drove inventory building in the second half of 2018, then drew down in the first half of 2019. Counter tariffs have made American exports less competitive, which is hurting U.S. manufacturing.”

Denoyer also explained the double-digit growth in private fleets has impacted freight volumes for for-hire trucking fleets. With spot rates down nearly 20%, however, it provides a disincentive for private fleets to continue to expand, he said. This suggests that freight demand is expected to return to the spot market in 2020 and is key to the next upcycle in the trucking industry, he said.

In intermodal, the spot market comprises about 2% to 5% of the carrier’s business, Field said. The low truckload spot rates could be impacting shippers who have special needs for freight. In the past, they might have shipped their special project freight via intermodal, but they might not be shipping that this year, especially in the eastern United States, where the low rates are preventing businesses to ship through intermodal.

“But I think more than anything, the lower cost of the spot market is driving anticipation for lower contracted pricing in the upcoming bid season,” Field said. “That’s probably the biggest impact on us is a new expectation that prices may have room to move down next year. And we’ll have to wait and see how that looks as we go into the next bid cycle.”

In the second quarter, the carrier’s intermodal segment accounted for 64% of its operating income and 51% of revenue. The income declined 7.2% to $124.36 million, from the same period in 2018. Revenue in the segment fell 1.3% to $1.15 billion.

Also at the conference, Delco explained the growth of the carrier’s technology platform J.B. Hunt 360, and noted that in the past 18 months, 30,000 carriers have been added to it. A lot of focus has been on the carrier side of the platform, but soon the shipper portion of the platform will be developed, Delco said, noting an issue with the technology in the second quarter. But the carrier has started to receive feedback from shippers, and it’s been positive.

With regard to the carrier’s dedicated segment, 70% of the business can be attributed to private fleet conversions, and the average contract is more than four years, Delco said, adding that more business is expected in the pipeline. The process to complete a private fleet conversion sale was about 18 months, but it’s taking nearly 18 months to two years. When asked why, Delco said he hasn’t received feedback on that.

“There is not as much of an urgency,” he said. “Clearly, a year ago, the driver environment was a lot more challenging, so that may have expedited some of the closings, if you will. But no specific reason I’m aware of, why that time to close is extended.”

As part of the carrier’s dedicated segment, Final Mile comprises about $500 million to $550 million of the segment. It’s focused on a $12 billion to $15 billion market, which includes bulky furniture, appliances and pool distribution, he said. Final Mile has expanded as a result of recent acquisitions, and Delco explained that starting in the first quarter of 2020, Final Mile will be broken out from the dedicated segment in the company’s financial reports.

Last week, investment bank Loop Capital of Chicago changed its rating of J.B. Hunt’s stock to hold, from buy, and set a 12-month target price of $121. Loop Capital expected industry pricing to have a negative impact on the carrier and also noted some risk related to an unfavorable ruling in the arbitration case with Fort Worth, Texas-based BNSF Railway Co. In the fourth quarter of 2018, J.B. Hunt paid $134 million after arbitrators issued a clarified interim award, according to a Dec. 13 filing with the U.S. Securities and Exchange Commission. The amount was for the periods of May 1, 2016, through Dec. 31, 2017, and Jan. 1, 2018, through Dec. 31, 2018. In October 2018, the carrier announced it would pay $18.3 million related to charges claimed by the railroad company for customer services between April 2014 and May 2018.

Shares of J.B. Hunt (NASDAQ: JBHT) closed Monday (Sept. 16) at $115, up 4 cents or 0.03%. In the past 52 weeks, the stock has ranged between $124.81 and $83.64.