Analysts peg J.B. Hunt earnings per share to fall, revenue to rise in first quarter

Lowell-based carrier J.B. Hunt Transport Services Inc. started to be affected by the COVID-19 (coronavirus) pandemic in March and is expected to miss earnings expectations as a result of several one-time costs that included bonuses for truck drivers and other employees working to deliver goods amid the health crisis, analysts said.

After the markets close April 14, J.B. Hunt is expected to report earnings per share declined by 4.6% to $1.04 in the first quarter, from $1.09 in the same period in 2019, based on a consensus of 20 analysts. Revenue is expected to rise by 6.4% to $2.22 billion, from $2.09 billion.

In a first-quarter earnings preview, analysts Justin Long and Jack Atkins, senior associate Brian Colley and associate George Sellers, all of Little Rock-based Stephens Inc., expect $23.9 million in one-time costs that the carrier noted in a filing with the U.S. Securities and Exchange Commission to have about a 17-cents per share impact on earnings.

“Bottom-line, we expect a sizable headline miss with limited guidance on what lies ahead,” said Long, Atkins, Colley and Sellers. “That said, we think (J.B. Hunt) falls in the camp of high-quality businesses with structural advantages over the long term.”

Stephens recently named J.B. Hunt stock to its Art Collector List. The list included 37 companies that Stephens researchers encouraged investors to look at based on market conditions that “have put all of them on sale to varying degrees.” The listed companies are expected to “continue to outgrow their peers due to the competitive moat they have built around their business.”

Stephens analysts give J.B. Hunt stock an overweight, or buy, rating and lowered the 12-month target price to $114, a reduction of $17. They are comfortable buying the stock on the macro weakness in light of the scale and secular growth drivers in the carrier’s intermodal and dedicated segments and the technology platform J.B. Hunt 360, which represents “an underappreciated upside opportunity.”

Shares of J.B. Hunt (NASDAQ: JBHT) closed Tuesday at $98.45, up $1.52 or 1.57%. In the past 52 weeks, the stock has ranged between $122.29 and $75.29.

On March 26, J.B. Hunt disclosed three one-time costs expected for the first quarter, including a $12.3 million cost for one-time bonuses for employee drivers and other operational personnel, $8.2 million from an accrual adjustment related to the calculation of revenue division owed to BNSF in 2019 as part of the final award in arbitration and $3.4 million of stock compensation related to the retirement of two executive vice presidents. Combined, the costs will have a $23.9 million pre-tax impact on earnings, or a nearly 17-cents per share effect, that is expected to be excluded when assessing the company’s operational performance for the first quarter, according to Long, Atkins, Colley and Sellers. The accrual adjustment related to BNSF would account for a 20 basis point impact to 2019 intermodal margins.

J.B. Hunt has a healthy balance sheet, and $750 million on an undrawn revolver, which could be increased, Long, Atkins, Colley and Sellers said. Also, a potential slowdown in new dedicated contract freight could reduce its capital expenditures. Overall, the carrier has a large amount of liquidity to make it through a recession.

“While the fundamental set-up in the near term will clearly be challenging and visibility is limited in the midst of COVID-19, we view (J.B. Hunt) as a company we feel comfortable buying on macro sell-offs as we believe the business is structurally well-positioned as a leader in the intermodal/dedicated end markets driving essentially all of its operating income today with an underappreciated opportunity associated with its (J.B. Hunt) 360 technology initiative,” said Long, Atkins, Colley and Sellers.

INTERMODAL
Trends for January and February were mostly in line with expectations, but amid the COVID-19 pandemic, March volume was softer. Intermodal volumes are projected to fall 3% in the first quarter, from the same period in 2019. The volumes are expected to fall 10% in the second quarter of 2020, from the same period in 2019, and are projected to be down 5% in 2020, from 2019.

Pricing was mixed in the first quarter, but downward pressure is expected in the economic downturn, Long, Atkins, Colley and Sellers said. In the upcoming bid season, pricing is expected to fall 3% in 2020, from the same period in 2019. Also, lower fuel prices will negatively affect revenue per load.

Intermodal margins are an unknown, but Long, Atkins, Colley and Sellers expect “a lot of noise with the previously mentioned one-time items in the quarter.” J.B. Hunt will be challenged to improve its margins year-over-year until 2021 when comparisons become easier and the economy and freight market become more stable.

In 2019, the segment accounted for 52% of the company’s revenue and 61% of its operating income.

DEDICATED CONTRACT SERVICES
Long, Atkins, Colley and Sellers expected this segment to be “fairly resilient in the first quarter and should remain a source of stability going forward given the fixed / variable structure of this business, multi-year contracts and some consumer-related customers that are seeing volumes strengthen with demand for essential goods during COVID-19. However, we think that new contract activity will slow and are now assuming only 400 truck additions to the fleet in 2020 vs. (J.B. Hunt’s) long-term target of 800-1,000 truck additions annually.”

In 2019, the segment accounted for 29% of the carrier’s revenue and 37% of its operating income.

In March, J.B. Hunt management changed the way they internally evaluate the performance of the business segments and added a new segment with the start of the first-quarter earnings report, according to an April 7 financial report. As a result, the company has separated its Dedicated Contract Services segment into two reportable segments: Dedicated Contract Services and Final Mile Services. The company now has five reportable segments: Intermodal, Dedicated Contract Services, Integrated Capacity Solutions (brokerage), Final Mile Services and Truckload.

J.B. Hunt included a comparison of the separated business segments based on their 2019 and 2018 financial results.

In 2019, revenue for the carrier’s dedicated segment rose to $2.12 billion, from $1.78 billion in 2018. Operating income increased to $277.37 million, from $194.96 million. The segment had 9,779 trucks at the end of the fourth quarter, up from 8,929 at the same time in 2018. It had 27,015 trailers at the end of 2019, up from 25,721 at the same time in 2018.

In 2019, revenue for the carrier’s Final Mile Services segment rose to $566.56 million, from $374.84 million in 2018. It reported an operating loss of $8.79 million in 2019, compared to a loss of $1.54 million in 2018. The segment had 1,298 trucks at the end of the fourth quarter of 2019, up from 1,160 trucks at the end of 2018.

INTEGRATED CAPACITY SOLUTIONS
The first quarter of 2020 was volatile for the brokerage segment as the truck market became tighter in January, loosen in February and tightened in March, according to Long, Atkins, Colley and Sellers. First-quarter results should be in line with expectations, with gross margins deteriorating 50 basis points from the previous period, compared to the five-year average in which they improved 50 basis points. Operating losses are projected to be about $13 million in the first quarter.

Long, Atkins, Colley and Sellers expect losses to continue through mid-2021 as the carrier has not said it would change its investment strategy for J.B. Hunt 360. But they believe this part of the business is underappreciated with regard to how it could improve growth and use of the company’s asset-based businesses over the long term.