J.B. Hunt Transport Services (NASDAQ:JBHT) is scheduled to release first-quarter 2019 earnings on April 15. The transportation specialist is one of the earliest of major third-party logistics (3PL) carriers to issue its quarterly report this earnings season, and its results will be of interest to shareholders as well as observers of the truck, rail, and ocean freight industries. Below, let's review four key trends to focus on when J.B. Hunt reveals its results from the last three months.
1. Intermodal revenue and volume
Intermodal revenue (i.e., transport of goods across multiple modes of transport) is J.B. Hunt's most significant revenue stream -- last year, intermodal sales of $4.7 billion comprised 57% of total company revenue of $8.6 billion. In the fourth quarter of 2018, intermodal revenue rose 15% to $1.26 billion, as an increase in revenue per load, favorable freight mix, fuel surcharges, and customer rate increases all combined to offset a 1% decline in volume.
While shareholders will welcome another double-digit revenue advance, as this will propel J.B. Hunt's overall top line, they'll also watch for volume to hit par or advance by a percentage point or two. After all, slight volume improvement should be attainable given a domestic economy that is still exhibiting moderate growth.
2. Dedicated fleet additions
Tight capacity in the truck shipping industry has created a boon for 3PL carriers over the last two years, leading to favorable price increases on contract renewals. But capacity constraints have also forced carriers to beef up on both owned fleet and outsourced tractors and trailers.
This phenomenon is evident in J.B. Hunt's second-largest business segment, its dedicated contract services (DCS) unit, which offers supply chain solutions and last-mile delivery services for a group of long-term customers (typical contracts range from three to 10 years).
In 2018, DCS grew its total truck fleet by 16% to 10,115 trucks. Of this nearly 1,400 truck increase, 600 units were added in the third quarter of the year, and 485 were added in the fourth quarter. My guess is that the sequential pace of truck additions will slow again this quarter, indicating that the company is now well resourced to meet demand, and perhaps hinting at a larger easing of capacity constraints in the industry.
3. The direction of spot rates
Despite this prolonged period of tight trucking capacity, a few concrete signs suggest that the freight industry may be catching up to demand. According to industry website Freightwaves.com, long-distance trucking rates fell by 1% sequentially in February, marking the second consecutive month of decline and figuring as the largest single-month dip in long-term rates since February 2015.
While a couple of months of softer pricing doesn't constitute a trend reversal, it does underline observations from J.B. Hunt executives last quarter that the spot market (i.e., real-time quoted market for noncontracted business) is showing signs of weakening.
This may have some near-term impact on profitability, as it takes time for 3PL carriers to adjust costs against a less robust pricing environment. Look for management to provide some color on the state of the spot market, particularly in intermodal and long haul transportation, during the company's upcoming earnings conference call.
4. Rising rents and purchased transportation
Often, revenue trends for transport organizations seem to exhibit more stability than earnings trends. This is because a considerable portion of logistics organizations' costs are tied to outsourced services -- this is true even for carriers with significant owned fleets like J.B. Hunt, and these costs can shift widely from quarter to quarter.
While some competitors like C.H. Robinson Worldwide include separate schedules within earnings filings to report "net revenue," which subtracts outsourced services from total revenue, J.B. Hunt presents revenue on a gross basis. But we can find the impact of outsourced services in the "rents and purchased transportation" line item on the company's income statement.
Rents and purchased transportation inched up last year by 70 basis points against 2017 to 51.5% of total revenue. In the fourth quarter, the line item rose sharply by 320 basis points to 54.8% of total revenue. As the largest expense on J.B. Hunt's profit and loss ledger, higher outsourced services totals can weigh on net profitability.
Thus, shareholders should compare the percentage of rents and purchased transportation to total revenue in the first quarter of 2019 against both fourth-quarter and full-year 2018 percentages. In the best-case scenario, the Q1 percentage of outsourced services to sales will revert back to the full-year 2018 benchmark of 51.5% or perhaps fall even lower.
On the other hand, any slowdown in top-line growth, perhaps exacerbated by less resilient spot pricing, could push rents and purchased transportation past 55% as a percentage of sales. This would have negative implications for full-year profitability, and also perhaps provide an interesting tea leaf to read regarding the state of the larger transport industry.