Analysts expect J.B. Hunt’s second quarter earnings to remain flat

J.B. Hunt Transport Services has regained some ground as the dynamics of supply and demand have strengthened recently, transportation analysts said.

Analysts Brad Delco and Justin Long, both of Little Rock-based Stephens Inc., expect J.B. Hunt’s second-quarter earnings report on Monday (July 17) to dictate the direction of publicly-traded carriers. The Lowell-based carrier will be one of the first to report its earnings for the quarter. (Delco, Long and Stephens provide investment banking services for J.B. Hunt and are compensated accordingly.)

“We remained bullish on the long-term prospects of (J.B. Hunt) with its diversified service platform, and capacity solutions available to customers in what appears to be a tightening supply/demand environment,” according to Delco and Long.

J.B. Hunt is expected to report second-quarter earnings of 92 cents per share, based on a consensus of 20 analysts. In the second quarter of 2016, the company reported earnings of 92 cents per share.

Delco and Long lowered expectations 1 cent to 90 cents per share as the company’s brokerage division has the “potential for greater margin contraction.” More than 60% of the segment’s business operates on contract, and spot capacity became more expensive in the second quarter. Revenue is projected to rise 7.8% to $1.74 billion from $1.62 billion, based on a consensus of 15 analysts. Delco and Long maintain a buy rating for the carrier and a target stock price of $105.

Load volume for intermodal, which accounted for 64% of the company’s operating income in the first quarter, is expected to rise 4.6% to 2 million in 2017, according to Delco and Long. This is lower than the company’s expectations of a rise between 6.2% and 9.5%, or 2.03 million and 2.09 million loads.

“At this point we largely expect (J.B. Hunt) to guide down on (intermodal) volumes, but we also think investors are second guessing themselves given recent strength/firming in industry fundamentals.”

“Without question, the market has seen seasonal strength during the (second quarter), but the question is now shifting to whether this seasonal strength is transitioning into more of a cyclical shift in supply/demand dynamics for the industry. If this strength transitions from seasonal to cyclical strength ahead of what many believe will be a secular shift in competitive dynamics with the mandate for ELDs, we see further support for (J.B. Hunt) stock to move higher.”

Delco and Long foresee more upside to the stock related to expansion and improved earnings as intermodal pricing becomes positive, which is likely to happen in early 2018. The company “remains a core transportation holding as a result of its ability to grow in a choppy macro-environment, strong return profile, under-levered balance sheet and ability to return value to shareholders with further share repurchases and dividends.”

On Tuesday (July 11), shares of J.B. Hunt (NASDAQ: JBHT) were trading at $92, down 73 cents or 0.79%. In the past 52 weeks, the stock has traded between $102.38 and $76.20.

MARKET TRENDS
In the second quarter of 2017, North American rail volumes rose 6.9%, from the same quarter in 2016. But in the quarter last year, volumes were down 8.1%, from the same quarter in 2015.

Intermodal, coal and nonmetallic minerals contributed to 78% of the volume growth in the second quarter of 2017, according to Long. Intermodal volumes rose 5% in the quarter, from the same quarter in 2016. However, volumes were down 5% in the quarter last year. “Intermodal should benefit from the anticipated tightening in (truckload) capacity as the ELD mandate goes into effect at the end of the fourth quarter (Dec. 18).”

Rail pricing was stable in the second quarter, “and the focus now turns to the supply/demand dynamics in (the second half of 2017) as many have noted an anticipated tightening of capacity,” Long said. “Encouragingly, the (truckload) sector has seen seasonal strength in the second half of (the second quarter of 2017). However, given we are now entering a seasonally slower period for transportation demand, we believe the direction of the pricing environment will largely be contingent on how peak season plays out (likely more of a [fourth-quarter 2017] event) and when ELDs start to impact pricing discussions (likely more of a [fourth-quarter 2017]/2018 event.)”

The recent strength in the trucking industry has been “primarily driven by an improved food and beverage/produce season, driving tighter capacity as evidenced by spot rate trends,” according to Delco. “Declining fuel prices also served as a positive through (the second quarter), providing a nice tailwind to (earnings per share) for the group.”

Spot rates have improved, but contract rates have remained “lackluster,” Delco said.

However, the biggest concern is “driver wage inflation. On one hand, drivers are the only supply constraint for the industry, so wage pressure should be interpreted positively for rates. Very rarely have we seen wage pressure without corresponding rate increases.”

“Given the uptick in freight demand through much of the quarter, we believe utilization (average miles/tractor) should improve, particularly given the more disciplined capacity strategies by many carriers,” Delco said. “That said, we believe the used truck market remains challenged with continued weakness likely a persistent theme for the group over the near term, both in terms of higher depreciation and lower gains on sale of equipment.”

Orders of class 8 trucks, representing the tractors of a tractor-trailer, rose 39% to 18,100 units in June, from the same month in 2016, according to ACT Research. The number of orders is up 1,200 units from May.

“Because of a deep seasonal trend that runs through class 8 orders, seasonal adjustment provides a significant boost to June’s orders,” said Kenny Vieth, president and senior analyst at ACT. “When adjusted, the June volume rises to 20,200 units.” In the second quarter, the seasonally adjusted annual rate of orders was 251,000 units, from 268,000 in the first quarter.