On J.B. Hunt Transport Services’ (NASDAQ: JBHT) fourth-quarter conference call, management said it would review long-term margin expectations throughout all of the company’s divisions in 2021, including the 11% to 13% target for the intermodal segment.
The Lowell, Arkansas-based company reported earnings per share of $1.44 after the market close on Tuesday, beating the consensus estimate of $1.30 and the year-ago result of $1.35.
Headwinds could alter long-term intermodal margin target
The amount of time it is taking for containers to complete one intermodal move continues to be a headwind for the company. High import volumes coming off the West Coast have plagued rail service, leaving containers stuck in the network longer than normal.
J.B. Hunt was forced to issue a service advisory during the quarter as its rail partners implemented gate restrictions in Chicago and Southern California due to high volumes. Further complicating matters is the increase in delays unloading those boxes at customer facilities. Container turns declined 4% year-over-year in the quarter.
Management said the volume was there to be had in the quarter but congestion and capacity headwinds kept growth in check. Loads increased 0.8% year-over-year, lagging intermodal volumes recorded at rail partners BNSF Railway (Berkshire Hathaway, NYSE: BRK.B) and Norfolk Southern (NYSE: NSC), which saw intermodal traffic increase 14% and 6%, respectively, in the period.
Conditions did improve as the quarter progressed, allowing J.B. Hunt’s intermodal loads to improve from down 2% in October to up 6% by December. However, operating income dropped 16% to $111 million as drayage and rail costs remained elevated. J.B. Hunt had a number of employees under quarantine, which required it to outsource dray moves at a much higher rate. Increased driver costs and medical expenses provided other headwinds.
The result was an 8.9% intermodal margin, 140 basis points worse year-over-year and well off the long-term expectation.
Management said the segment’s margin targets were under review but anticipated that intermodal results will improve during 2021. The company expects to recoup the impacts of an elevated cost structure through rate increases throughout the bid cycle. Guidance of high-single-digit to low-double-digit rate increases remains in place for the year.
The call is for 2021 to be a “more settled” year, yielding better results than the 2020 full-year margin of 9.2%. The segment has contended with several hurdles the past three years — arbitration expenses to settle a dispute on its BNSF contract, significant service headwinds due to precision scheduled railroading initiatives at the railroads and pandemic-related port congestion — which will be in the rearview during 2021.
While higher dray and rail costs as well as driver recruitment issues will persist, management believes those can be better absorbed as contracts renew at higher rates.
Also, the company has 6,000 new containers on order with the option to acquire more. Those units will be needed as J.B. Hunt’s customers have indicated that inventory restocking will likely run through the first half of the year, and as the company plans to outpace the industry in terms of volume growth moving forward.
The long-term outlook will be assessed over the next few months as the company works through its intermodal bid season with customers.
Pretty solid quarter across the company
Results in the brokerage division came in better than expected as the unit returned to profitability, posting operating income of $5.6 million in the quarter. Revenue jumped 56% year-over-year as loads increased 13% and revenue per load climbed 39%.
Higher spot and contractual rates along with a more than 20% increase in truckload volumes were the drivers of the improvement. Also, a larger contribution from the spot market aided the result as contractual volumes only accounted for 35% of brokerage revenue in the period compared to 54% in the 2019 fourth quarter.
Brokerage revenue on the digital freight platform, Marketplace for J.B. Hunt 360, increased 72% to $387 million. The number of third-party carriers on 360 climbed 19% to more than 100,000. The guidance for the brokerage unit to return to sustained profitability in the second half of 2021 remains in place.
Other wins were seen in the dedicated, truck and final-mile divisions. Dedicated booked more than 1,300 trucks in the year, and the plan is to add 800 to 1,000 revenue-producing trucks per year going forward. Final mile added $84 million in new business in 2020, and management expects to leverage its exercise equipment delivery channel through its recent acquisition of Mass Movement.
Truck saw revenue increase 50% year-over-year. The unit has embraced an asset-light model, allowing it to generate robust topline results not seen since 2008 while operating 70% fewer power units. Management credited load growth to the expansion of its drop trailer program, 360box, and capacity procurement from the 360 platform. Revenue per loaded mile, excluding fuel surcharges, increased 19% year-over-year with contractual rates increasing roughly 5%.
Shares of JBHT were down 6% in after-hours trading. The stock is up 8.7% since the beginning of the year as analysts have become more constructive on the company.