Year-on-year gain in J.B. Hunt intermodal volumes highlight of overall weak quarter
J.B. Hunt’s intermodal segment, the largest revenue producer in the company, showed year-on-year volume growth in the third quarter ending Sept. 30, a rare sign of upturn in an otherwise tough quarter.
While revenue was down compared to the corresponding quarter in 2022, volumes were up 1% year on year, an increase that received both an internal and external notice in looking for positives in the quarterly earnings.
In a quick email blast after the earnings were released Tuesday, Amit Mehrotra of Deutsche Bank said his team was “encouraged by the return to intermodal volume growth,” but that “we need to see more to offset the pressure on pricing and cost inflation.”
On the earnings call with analysts, Darren Field, the executive vice president of the intermodal division at J.B. Hunt (NASDAQ: JBHT), said the inventory destocking that the company believes is at the root of the freight recession “started to moderate in June.” Volume growth was down 1% in July, up 1% and August and up 4% in September, when Field said the company had “the largest intermodal volume week in our history.”
Volume increases have come in both the company’s transcontinental and Eastern network, Field said. “We believe this is driven by the overall market but also we believe we are taking market share with our strong service that is outperforming the competition.”
J.B. Hunt President Shelley Simpson echoed Field on the question of destocking. “We see further evidence of this trend,” she said.
Following the call, a note to investors from TD Cowen analyst Jason Seidl advised to look at the volume numbers on intermodal as being most significant in the J.B. Hunt earnings. “We…are focused on volume, which we consider to be the leading indicator of profits and margin given JBHT’s longer cycle pricing framework. And we are encouraged in this regard. We note JBHT’s volume was up 1.2% year over year and up 3.9% sequentially. While these numbers aren’t spectacular on the surface, they mask increased momentum as the quarter progressed. “
Looking past the growth in intermodal volume, which rose to 521,221 loads from 515,178 loads a year ago, revenue declined 15.3% and revenue per load dropped 16.3% to $2,984 from $3,565.
Intermodal’s revenue was 49% of the company’s total revenue.
Mehrotra called J.B. Hunt’s failure to meet the overall forecast performance a “decent-sized miss,” but said there were “some positive leading indicators that may mute the negative reaction in shares.” He said the company’s earnings per share, excluding a lower tax rate, was close to $1.66 per share, compared to a consensus of $1.80 or more.
As for the company’s bottom line, net earnings were $187.43 million, down from $269.4 million a year ago, a drop of 40.4%. Total revenue, excluding fuel, was $2.69 billion, down 14.9%. Post-market trading in J.B. Hunt was decidedly negative. At 6:05 p.m. EDT Tuesday, the stock was down $7.51 from the earlier Tuesday close to $188.50, a drop of 3.83%. The price of the company’s stock has been relatively strong. In the last 52 weeks, it is up about 18.2%, and in the last three months, the increase has been near 6.9%. But it is down from its 52-week high of $209.21 recorded Aug. 4.
Seeking Alpha said the $3.16 billion revenue for the quarter at J.B. Hunt — a figure that includes fuel surcharge revenue — missed forecasts by $40 million.
With the intermodal segment turning in an operating ratio of 91.8%, deteriorating from 88.2% a year ago despite the small increase in volume, Field was asked about whether that signals a bottom in the quarter.
Field said the answer to that question “depends on what happens with our customers’ volumes.”
“But if everything were to remain equal and we can onboard more volume and there’s no economic recession we’re faced with, yes, it can be the bottom. But there’s so many external factors that are going to influence that,” he said.
But when asked about the signals for the fourth quarter, Field was more bullish. He said the J.B. Hunt intermodal operations “continue to bring equipment out of storage. None has gone back in and demand remains really, really strong, just as it was throughout September.”
It was the company’s brokerage unit, which operates as Integrated Capacity Solutions, that took some of the most significant hits during the quarter. The number of loads handled by ICS dropped to 163,745, down from 262,803, a decline of 37.7%. Revenue per load fell to $1,820 from $2,189, a decline of 16.8%. The gross profit margin fell to 12.8% from 14.2%.
Operating income fell to a loss of $9.4 million, compared to an operating profit a year ago of $13.4 million.
Revenue that flowed through J.B. Hunt 360, the company’s digital offering, fell a whopping 56.9%, down to $168.5 million from $391.1 million.
Cutbacks in the company’s brokerage operations, as has been seen in numerous logistics companies, was evident in a head count decline to 680 from 1,002.
Dedicated also was cited by Mehrotra as an underachiever in the quarter though the outright numbers were not particularly weak. Operating income declined to $102.4 million, down from $107.1 million. Revenue declined a relatively modest 4.1%.
Operating income for all segments was down from a year ago. Intermodal’s operating income fell 41% to $128 million while its operating ratio weakened to 91.8% from 88.2%. Dedicated’s OR stayed flat at 88.5% while its operating income dropped 4.4%.
Truckload operating income dropped to $7.7 million, down from $14.9 million, while its OR rose to 96.1% from 93.7%.
On other issues, in response to an analyst question, Nick Hobbs, COO and president of contract services, said, “Solid drivers are still hard to find,” though he added that “they’re much more available than they have been.”
Hobbs added, “We still have pockets in different areas that are tight, and the driver wages are not going anywhere. They’re staying up.”
That lack of weakness in driver pay could be seen in the salaries, wages and employee benefits line in the company’s earnings. At $803.2 million, it was down from $887.7 million a year ago. But that expense line was 25.4% of revenue this quarter and just 23.1% a year ago.
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