EUR 850.00 For Business Accounts Only

Morningstar | Intermodal Volume Grapples With Class I Service Headwinds in J.B. Hunt's 1Q; Shares Fairly Valued

Narrow-moat intermodal specialist J.B. Hunt's consolidated first-quarter revenue before fuel surcharges increased roughly 8% year over year; this was below our expected run rate for the quarter mostly because of intermodal volume headwinds from winter weather disruption and lane closures related to Class I railroads’ precision railroading efforts. Further, truck brokerage (ICS) pricing weakened more than we expected due to increased competitive bidding conditions. Organic dedicated contract and for-hire truckload business were mostly in line. Adjusted operating margins fell slightly short of our forecast, mostly because of the impact of sluggish intermodal volume and utilization trends.

Overall, we don’t expect to materially alter our $97 fair value estimate. We tempered our top-line growth and margin assumptions for 2019, but the fair value impact was largely offset by the time value of money since our last update. Our longer-term midcycle assumptions remain mostly intact. The shares are trading in fairly valued territory, in our view. J.B. Hunt’s market valuation has become much more reasonable over the past few quarters (it was overvalued throughout much of 2018) as investor expectations have recalibrated to the prospect of more normalized pricing across the firm’s intermodal, trucking, and highway brokerage operations; the truckload market capacity crunch has abated. Class I service headwinds and related pressure on intermodal volume have also played a role.

J.B. Hunt’s flagship intermodal revenue increased a modest 2% in the quarter versus the solid 16% growth posted for all of 2018. Revenue per load increased 11% (before fuel) thanks to decent rate gains during the bidding season, but volume fell 7% thanks to the aforementioned weather and Class I service headwinds. We suspect there may have been a negative impact from U.S. retailers pulling forward imports into the 2018 summer months ahead of potential tariffs. That said, management sounded optimistic on the call about the likelihood of improved rail service in the quarters ahead, which should rekindle truck-to-rail conversion activity in the second half of 2019.

In the asset-based trucking operations, for-hire truckload (JBT) revenue increased 10% thanks to lingering benefits from strong pricing conditions over the past year. Dedicated (DCS) revenue grew 22%, partly driven by the Cory acquisition (final-mile services), but private fleet conversion activity remains healthy. Asset-light truck brokerage (ICS) gross revenue only increased 2% (it was up 30% in 2018), as 15% load-volume growth was largely offset by a 12% decline in average revenue per load stemming from increased competitive bidding conditions and tough comparisons for spot rates.

Relative to the same period last year, we calculate Hunt’s total adjusted operating margin fell 60 basis points, to 8%. The decline stems from softer intermodal utilization, rising driver costs, elevated IT-related investments, and costs associated with the firm’s final-mile services build-out. We think the firm’s IT investments, including the development of its J.B. Hunt 360 platform, will prove a longer-term positive in terms of better data analytics across segments and greater automation in the truck brokerage unit. We continue to expect modest margin improvement in the second half and in 2020 as intermodal volume trends recover.