J.B. Hunt Earnings: Intermodal Backdrop Remains Challenged

Narrow-moat-rated J.B. Hunt’s JBHT top line fell 14% year over year (excluding fuel) as revenue declined in all segments. While revenue fell short of our expectations, the overall decline is not surprising given ongoing freight-demand normalization, including retail sector inventory destocking and soft U.S. import trends. Also, intermodal activity probably saw added pressure from shippers’ concerns over west coast labor-related port disruption, which caused some imports to shift to the east coast.

Hunt’s flagship intermodal segment top line was down 19% on a 7% decline in container volumes, while average revenue per load (yield) swung negative on a year-over-year basis, falling 13%. The story has flipped versus first-half 2022 when underlying freight demand was strong, but rail service shortfalls and terminal congestion constrained volume growth. During first-half 2023, rail service and network velocity recovered, but underlying demand weakened due in large part to elevated retailer inventory levels. Additionally, truck-to-rail conversion activity and core intermodal pricing is facing incremental pressure from falling contract rates in the competing truckload sector.

Total adjusted operating margin deteriorated 100 basis points to 8.6% (slightly below our expected run rate) on lost leverage from lower revenue, particularly in terms of volume and pricing declines in the intermodal and asset-light truck brokerage divisions. Rising driver wages and higher maintenance outlays also contributed. We will likely temper our near-term top line forecasts, but we don’t expect to materially alter our $165 DCF-derived fair value estimate. The shares look slightly rich relative to our long-term free cash flow forecasts.