J.B. Hunt Earnings: Intermodal Headwinds Remain Stubborn

Narrow-moat J.B. Hunt Transport Services’ JBHT third-quarter consolidated top line fell 15% year over year excluding fuel, similar to the second-quarter decline, with sales down in all segments. Intermodal revenue was short of our expected run rate, as we anticipated a slight sequential uptick in retail sector inventory restocking that didn’t occur. That said, we were expecting overall year-over-year declines to persist across Hunt’s intermodal, trucking, and brokerage operations, driven by tough comparisons and incremental demand and pricing normalization.

Hunt’s flagship intermodal top line fell 15% on 16% lower average revenue per load. Yields swung negative year over year in the second quarter on lower fuel surcharges, easing accessorial fees (storage), and core intermodal pricing facing headwinds from depressed rates in the competing truckload sector, which tempers intermodal’s value proposition. Underlying freight demand is under pressure from scant retail restocking, including lower import activity, but Hunt’s container volume surprisingly increased 1%, versus 6% year-over-year declines posted in the first half of this year. We suspect growth stems from market share gains, since industrywide volume was still down materially in the quarter.

Total adjusted operating margin deteriorated 180 basis points to 7.6%, below our expected run rate, on lost leverage from lower revenue, particularly in intermodal and truck brokerage. Driver wage inflation and rising maintenance outlays were also factors. Intermodal margin fell to an unusually low 8.2% from 11.8% a year ago. We will temper our near-term top-line and margin forecasts, but we don’t expect to materially alter our $165 discounted cash flow-derived fair value estimate as we’ve already baked in a meaningful freight correction. The shares look slightly rich relative to our long-term free cash flow forecast.