J.B. Hunt's third quarter profit falls 5%

Revenue up 7%, but brokerage, trucking units feel strains

Graph showing J.B. Hunt's 3rd Quarter finances
Graph showing J.B. Hunt's 3rd Quarter finances

J.B. Hunt Transport Services Inc. posted a net income of $109.4 million in the third quarter of 2016, or 97 cents earnings per share, a 5 percent decrease from last year's $115.1 million, or 99 cents per share.

The Lowell-based company reported revenue up 7 percent to $1.69 billion from $1.59 billion last year. The average of analysts polled by Thomson Reuters had projected $1.02 earnings per share and $1.68 billion in revenue for the quarter ending Sept. 30.

"Earnings obviously missed our expectations, but investors are most focused on their two largest segments -- intermodal and dedicated -- which met expectations," said Brad Delco, transport analyst for Stephens Inc. Stephens had projected 99 cents earnings per share for the company's quarter.

"Relative to our model, the two segments that drove the miss in expectations were integrated capacity solutions and [trucking]," he said.

While the brokerage division, called integrated capacity solutions, grew its load volume by 88 percent, revenue per load was down 28.5 percent because of lower fuel prices and less revenue from fuel surcharges, the company said in its earnings release.

"J.B. Hunt has grown the branches of that segment by seven in the last 12 months, and six of those came in this quarter," Delco said. "They continued to invest in growth, which put pressure on near-term margins but should translate into future top-line growth."

Integrated capacity solutions posted $233 million in revenue, a 35 percent increase, though operating income was down 26 percent from the same quarter of last year to $8.5 million. It has grown its carrier base by 14 percent, opened the seven additional branches for a total of 40, and increased its employee count by 18 percent. The segment now represents 14 percent of total company business, up from 11 percent in the third quarter of 2015.

"What they're basically saying is 'We're willing to take some near-term pain for longer-term gain,'" Delco said.

The Fortune 500 company's smallest division, trucking, reported flat revenue compared with last year, at $97 million, and a 55 percent drop in operating income to $5.1 million. In 2015, the trucking division reported the biggest increase of all segments for the third quarter.

As described in the release, gains from an increased truck count and improved utilization were countered by higher costs of equipment maintenance, safety, insurance and hiring drivers, as well shrinking rates "mostly from customer driven freight mix changes."

The trucking division used 83 more tractors than in 2015, now at 2,183. In the third quarter of last year the division increased its truck fleet by 250 compared with 2014.

The company's intermodal segment reported $970 million in revenue, up 2 percent from last year, though operating income was down 7 percent to $116.9 million. J.B. Hunt is known as a leader in the intermodal business, which refers to moving freight using multiple modes of transportation.

The earnings release said improvements in the sector were "offset" by lower customer rates; more expensive rail rates; increases in the cost of equipment ownership, insurance and claims; and the expense of recruiting and retaining drivers. Intermodal now represents 57 percent of total business, down from 60 percent the year prior.

"The intermodal industry has seen a lot of pressure from the low rates of the over-the-road industry and low diesel-fuel prices, because both of those lower the intermodal discount compared to trucking," said Matthew Young, an analyst at Morningstar. However, he said J.B. Hunt "is still well ahead of the rest of the market and in general that's fairly impressive."

The dedicated contract services division posted a 6 percent increase in revenue to $394 million and a 16 percent increase in operating income to $52.5 million compared with last year. It expanded its fleet by 205 trucks from the third quarter of 2015 and attributed general growth to increased productivity, customer rate rises and other improvements. The segment remains 23 percent of the company's total business.

"They're doing well in a challenging market across the board," Young said.

In general, the earnings reflect ongoing difficulties the trucking industry has been facing.

"The whole trucking industry right now has been hammered by overcapacity, and that, combined with the soft economy, has just been brutal," said Bob Williams, senior vice president and managing director at Simmons First Investment Group Inc.

In July the company lowered its projected total earnings growth for 2016 to 7 percent from a previous 9 percent-12 percent. It blamed higher rail costs and "customer rate behavior" for the change at the time.

"There are no meaningful expectations for an acceleration or deceleration in the economy, so it's been choppy for the better part of the last several years," said Delco of the broader economic climate.

J.B. Hunt shares trading on the Nasdaq exchange closed down nearly 2 percent at $78.45.

Business on 10/18/2016

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