J.B. Hunt’s earnings call highlights headwinds in brokerage and intermodal

J.B. Hunt truck on highway

J.B. Hunt Transport Services’ (NASDAQ: JBHT) fourth quarter 2019 earnings miss, about 10% according to most consensus estimate providers, was partly due to its continued investment in Marketplace for J.B. Hunt 360.

The digital load-matching platform connects carriers and shippers. From the outset, management said that they expected cost headwinds from the roughly $500 million investment in the platform — including scaling the platform, personnel and technology — to weigh on results for four to six quarters.

J.B. Hunt released its shipper portal on the platform, Shipper 360 by J.B. Hunt, in November.

Spot-market fundamentals were a drag on ICS

The earnings drag from the investment was noticeable in the company’s brokerage business, Integrated Capacity Solutions (ICS), which reported an $11.8 million loss in the quarter. ICS revenue increased 9% year-over-year, with loads up 3% and revenue per load 6% higher. However, gross margins in the business eroded 630 basis points to 10.6% as costs from expanding the digital platform were a headwind. It wasn’t just the investment that presented a headwind.

ICS Key Performance Indicators

Management said that the margin compression, which accelerated through the quarter, was driven by the supply side with the company’s available number of carriers declining in December and thus far in January. Management noted that truck capacity began to tighten the week prior to Thanksgiving, accelerating in December, and only modestly loosening so far in January.

Further, management believes that the condensed holiday season, roughly one week shorter in 2019 versus 2018 due to a later Thanksgiving, resulted in “very tight” capacity in the back half of the quarter; 65% of ICS revenue was contractual in 2019 versus 53% in the fourth quarter of 2018. That means that the company was buying truck capacity at presumably a higher rate than that provided by its previously negotiated contractual rates. Further, J.B. Hunt was growing market share in the face of tighter capacity for at least part of the quarter.

The commentary on capacity tightness lines up with the increases seen in the number of loads rejected by carriers. Load rejections spiked as high as 153% year-over-year during the 2019 holiday spending season and still remain 37% higher than the year-ago period.

Outbound Tender Reject and Outbound Tender Volume Indexes – SONAR: OTRI.USA, OTVI.USA

No formal guidance on intermodal yet

Management didn’t provide any definitive guidance around intermodal expectations in 2020. They noted that the first quarter of 2020 has a bit of a tailwind as some 60,000 to 70,000 loads on an annualized basis were lost in the first quarter of 2019 due to lane closures by the railroads. The only intermodal volume guidance provided by management was that they expect volumes to increase in 2020.

During fourth quarter 2019, J.B. Hunt reported a 1.6% year-over-year increase in intermodal loads, likely much better than the industry. On average, the U.S. Class I railroads reported a 6.6% year-over-year decline in container volumes, with J.B. Hunt’s primary rail partners Norfolk Southern (NYSE: NSC) reporting a 6.4% decline and BNSF Railway (Berkshire Hathaway Inc. NYSE: BRK.A) reporting a 2.3% decline in container traffic during the quarter. While J.B. Hunt appears to have taken market share in the period, yields were modestly lower as revenue per load declined 1.2% year-over-year even though average length of haul increased 2.8%.

Intermodal Key Performance Indicators

No guidance was provided on intermodal pricing other than to acknowledge that there were some headwinds facing pricing. Management said that it’s too early to make a call on intermodal pricing for 2020, noting a “difficult capacity market” and that “there’s pressure out there.” However, they said that if rail purchased transportation costs increase, they would expect to be able to raise rates by at least a commensurate amount.

Longer-term intermodal fundamentals appear to remain in place. The company sees roughly 8 million to 10 million loads currently being moved by truck that are likely eligible to convert to rail. The key will be whether the railroads can provide an improved service offering on a consistent basis or not. Through precision scheduled railroading (PSR) the rails have seen significant improvement in their service offerings. However, some in the industry believe that this has as much to do with mid- to high single-digit volume declines as it does with PSR initiatives. Management believes that continued volume growth is attainable and said that they are gaining traction with the midsized shipper market that is being introduced to intermodal through the 360 platform for the first time.

Dedicated the star again

The company’s dedicated division continues to provide strength to their financial model. Revenue in the division increased 20% year-over-year as loads increased 17% and revenue per truck per week climbed 11% excluding fuel surcharges. Average dedicated trucks increased by more than 1,100 units and management said that they plan on adding another 800 to 1,000 trucks in 2020. The dedicated division benefited from a previous acquisition (Cory 1st Choice Home Delivery) in its final-mile offering and added scale with another final-mile acquisition (RDI Last Mile) earlier this month.

With the rapid expansion of Final Mile Services, plans are to break out the unit’s financials separately beginning in the first quarter. Management expects this division to continue to outpace the broader final-mile market in terms of growth as it is expected to be a billion-dollar business in the future, compared to a roughly more than $500 million annual run rate currently.

Potential suitor of XPO’s last mile unit

When asked if they would consider a “very large” final-mile acquisition, presumably a reference to XPO Logistics’ (NYSE: XPO) announcement that it would explore divesting potentially all of its business units except for less-than-truckload, J.B. Hunt’s CEO John Roberts said he “hadn’t thought about it until two days ago.” However, he went on to say that the company would “never say never” and could lever up the balance sheet, borrowing the capital needed to acquire such an entity as long as the financial returns are met.

Shares of JBHT were 4% lower on the day.

JBHT Stock Price Chart – SONAR: STOCK.JBHT