EUR 850.00 For Business Accounts Only

Morningstar | J.B. Hunt's 3Q Results Mostly In Line; Tight Truckload Market Capacity Remains Robust Tailwind

Narrow-moat intermodal specialist J.B. Hunt's third-quarter revenue before fuel surcharges increased 17% year over year, mostly in line with our expected run rate as slower-than-anticipated intermodal load growth was largely offset by a strong uptick in core intermodal pricing (aided by tight capacity in the competing trucking industry). Total profitability came in shy of our previous assumptions because of a few nonrecurring driver-related legal settlements and one unfavorable outcome from an ongoing contract-related arbitration involving the company and its key railroad partner, BNSF. Hunt and Class I railroad BNSF, which provides the underlying line-haul movement of Hunt’s containers, have had a long-running revenue-sharing arrangement that’s proved highly lucrative since 1991. Arbitration is nothing new to the process as both companies periodically iron out differences. The relationship has endured previous disagreements without much in the way of margin degradation for Hunt, and we expect a similar outcome this time around, though it remains a factor to monitor.

Although our longer-term midcycle revenue growth and margin assumptions are intact, we expect to increase our $95 fair value estimate slightly (by roughly 2%) to reflect the time value of money since our previous update. As of the Oct. 15 market close, the shares are trading in modestly overvalued territory.

For Hunt’s flagship intermodal operations, the competing full-truckload industry is likely to continue to see unusually tight capacity throughout the remainder of 2018 as a result of healthy underlying demand and widespread adoption of electronic logging devices (true enforcement began April 1), which is lowering productivity for a large swath of the truckload carrier base. Firm capacity should remain a solid tailwind for intermodal truck-to-rail conversion activity in the eastern half of the United States, where conversion opportunities are most abundant. The favorable operating backdrop is also bolstering Hunt’s for-hire (JBT) and dedicated (DCS) trucking operations thanks to robust contract pricing conditions. DCS in particular is seeing strong private-fleet conversion business as shippers look to secure reliable capacity.

Relative to the same period last year, we calculate Hunt’s total adjusted operating margin increased 60 basis points to 9.6%, which excludes $18.1 million of legal settlement charges and an $18.3 million outlay related to charges claimed by BNSF (as part of the ongoing arbitration). In terms of key highlights, adjusted intermodal margins rose 170 basis points to 12.1% thanks to leverage from strong pricing, partly offset by higher rail purchased transportation, inefficiencies from rail congestion, and rising driver-related outlays. Adjusted DCS segment margins fell year over year because of new-contract implementation costs and continued investment in final-mile delivery services, but overall truckload profitability remains healthy.