J.B. Hunt Transport Services Inc. (NASDAQ: JBHT) reported third quarter 2019 earnings per share (EPS) of $1.40, a nickel less than consensus estimates.
The Lowell, Arkansas-based company reported an 8.6% year-over-year increase in revenue excluding fuel surcharges. Total revenue was nearly $2.4 billion in the period.
Integrated Capacity Solutions (ICS) revenue through Marketplace for J.B. Hunt 360 increased 36% year-over-year to $205 million. Further, the company reported that $46 million of third-party dray costs and $16 million of its independent contractor costs were processed through the platform in the quarter. Marketplace for J.B. Hunt 360, a digital marketplace for carriers and shippers to match loads, is now on a $1 billion annual run rate.
A good portion of the company’s conference call centered on questions around Marketplace and the initiatives within Marketplace. Management said that the platform is still in the infancy stage and that there is still a good deal of data science work to do. However, one of the big initiatives for the platform is addressing the 7 to 11 million shipments on the road that could move via intermodal.
The thought is that if shippers have access to the data and real-time monitoring load availability, these loads are ripe for conversion to intermodal. Management also seemed emboldened by the intermodal growth plans at the eastern railroads, which have stated that they would like to grow volumes by 10% in 2020. While intermodal conversion is still subject to normal market conditions/fundamentals like fuel prices, service costs and overall rail service, the company sees many digital growth opportunities available to it.
Intermodal
Intermodal revenue increased 2% to $1.24 billion as volumes were flat year-over-year. Transcontinental loads were up 7% as loads in the company’s eastern network declined by 11%. Intermodal revenue per load increased 2% year-over-year (+5% excluding fuel), which was attributed to rates, freight mix and fuel surcharges. The division reported a 10% decline in operating income, excluding one-offs like arbitration, legal claims and a customer bankruptcy, due to increased purchased transportation costs, higher container repositioning costs, lower container turns and driver recruiting/retention efforts.
Management said that intermodal bid season is just getting underway and it’s really too early to determine how revenue per load will shake out. That said, they did say that if costs are up they expect to get positive pricing to at least cover these cost increases. Further, management said that bid compliance is improving and that intermodal pricing could improve next year even if truckload (TL) pricing moves lower. They expect rail service to continue to improve, especially as other rail commodities remain weak. J.B. Hunt is expecting intermodal margins to improve sequentially in the fourth quarter of 2019.
Dedicated
Dedicated revenue increased 28% to $696 million. Revenue per truck per week increased by 9% year-over-year (+11% excluding fuel) to $4,927. Management cited a prior acquisition, rate increases and improved fluidity as the reasons for the increase. The division had nearly 1,300 additional revenue-producing trucks in the quarter compared to the same period in 2018. Dedicated operating income increased 80% year-over-year, excluding charges, to $78 million.
Management said that the sales pipeline remains robust and that they are still expecting to add 800 to 1,000 trucks with rates continuing to improve. J.B. Hunt’s final mile network rolls up through dedicated and is now operating at a $550 million run rate, which management believes can be grown at a 10%+ clip per year in the near-term.
Brokerage
ICS revenue declined 3% year-over-year to $337 million as volumes were down 4%, partially offset by a 2% increase in revenue per load. Contractual brokerage volumes accounted for 74% of total load volume, and 62% of total revenue in the division. The division operated at a loss of $5.6 million in the period. Excluding charges and a customer bankruptcy in the 2018 third quarter, operating income was $18.9 million lower as the gross profit margin declined 280 basis points to 12.7%. A competitive contractual rate environment and a weaker spot market were listed as reasons for the margin weakness.
Management said that brokerage bid season is just starting and that it has been competitive on the contractual side as newer outfits are trying to take share. Going forward, they believe that this division will return to profitability, but they are investing heavily in technology and people that will weigh on future results. They said that they are still trying to understand the multitude of new data available to them. Operating income results will likely continue to be pressured by new investments, but these investments in technology and people will increase the company’s capabilities as well as its total addressable market. The addition of new carriers and new lanes will pressure margins as well.
They highlighted that the division will not be a loss-leader for long and will return to being a profit center. They noted that these are the pains of trying to fully transform the unit into a digital platform. Management did point to the probability of productivity improvements in late 2020, which will open the door to a return to profitability.
Truckload
Truck revenue declined 11% year-over-year as loads were down 3%, rates per loaded mile declined 5% and length of haul was down 2%. Revenue per tractor per week was down more than 12% year-over-year at $3,829. Management noted that contractual rates increased approximately 1.5% in the period. Operating income was down 28% to $6.6 million in the truck division. Fewer loads and more empty miles per load were the reasons for the decline. Capacity remains loose and the company expects a sluggish environment in the first half of 2020 with some improvement likely in the second half depending on the macro-economic environment.
