Wall Street was already worried about trucking companies heading into earnings season, but the first-quarter miss by J.B. Hunt Transportation (NASDAQ:JBHT) still seemed to catch markets off guard and rippled through other prominent transport stocks.
J.B. Hunt on April 15 reported first quarter earnings of $1.09 per share on revenue of $2.09 billion, missing analyst expectations for $1.26 per share in earnings on $2.21 billion in sales. The results were hit by intermodal load volumes that were down 7% year over year, including down 8% for transcontinental business.
The results sent shares of J.B. Hunt down 3.5% and put pressure on other truckers including Heartland Express (NASDAQ:HTLD), Knight-Swift Transportation Holdings (NYSE:KNX), and USA Truck (NASDAQ:USAK).
The question for investors in J.B. Hunt and other truckers following the report is whether the results were due to company- or weather-specific issues that were short term in nature or are an indication of the health of the overall trucking sector.
Is this a one-quarter speed bump or a longer trend?
J.B. Hunt management knew this was shaping up to be a tough quarter. Low unemployment has left J.B. Hunt and other truckers scrambling to find drivers, and the company cited higher driver compensation as a negative.
There were also network issues to contend with: The company derives about two-thirds of its revenue from intermodal (cargo that travels to its destination via multiple forms of transit like ship to truck or truck to train) and had to navigate planned rail lane closures especially on key Eastern seaboard routes.
The impact of severe winter weather, especially around Chicago, added to the delays. But even as the weather improved, business did not pick up.
"We did not see a snapback in customer demand in March which was our biggest surprise and frankly our miss to our expectations," CFO David Mee said on an investor call. "While it is way too early to make a trend call for even second quarter 2019 or for the rest of the year, we are still waiting for customer demand to accelerate."
Intermodal was consistently weak throughout the quarter, with volumes down year over year by 7% in January, 6% in February, and 7% in March. Intermodal was further hit by railroads successfully pushing through price increases, dampening overall profitability for the segment.
J.B. Hunt said West Coast shipping was down in the quarter compared to expectations, potentially suffering due to a slowdown in manufacturing around the Chinese New Year. The talk of trade wars and tariffs in late 2018 also caused customers to move forward delivery of goods, creating stockpiles that reduced demand for further shipments in the first three months of 2019.
"The other thing that we're hearing from customers is that the warehouses are full," Terrence Matthews, president of the company's intermodal division, said on the call. "We've got a very late spring and typically the restocking of spring merchandise did not show up in March as it has in past years."
Management said the weakness didn't disappear when the calendar turned from March to April, implying that analysts are likely to reduce their second-quarter estimates in the weeks to come. But J.B. Hunt CEO John Roberts said on the call that he's not anticipating a full-blown slowdown.
"I'm feeling OK about the rest of the year," Roberts said. The CEO noted the Purchasing Manager Index (PMI) has been strong for the last two months, indicating that there is no slowdown in orders. Combine the strong PMI with an assumption that merchants will work down their inventory and begin to restock their warehouses and with some sort of clarity on tariffs, and "those three things should mean that we have a reasonable year in 2019."
J.B. Hunt is also making progress with hiring and retaining drivers. The company said that while there are still some tight markets, notably California and Chicago, nationally, wage incentives have eased of late. The issue is unlikely to completely go away as long as the unemployment numbers are low, but investors can hope that wage rate growth will not further weigh on earnings throughout the year.
No reason to jump in
Even if Roberts is correct and there is no recession immediately down the road, J.B. Hunt's disappointing quarter does not provide much reason for investors to buy into trucking stocks. The picture painted by the J.B. Hunt quarter is that of decelerating demand and tough competition, with earnings challenged due to higher costs.
Among transport firms, J.B. Hunt's commentary on rail pricing would suggest that railroads are a better pick than truckers for the quarters to come, an idea backed up by initial railroad earnings reports.
J.B. Hunt is a best-of-breed trucker, and for a long-term holder who wants to own a quality name for a lot longer than the next business cycle, it is worth having on the radar. But even after the post-earnings decline, J.B. Hunt shares are still up year to date thanks to a strong January and 10% above their Christmas Eve lows, when investors were in full panic mode about the economy.
Given the macroeconomic risks and the lack of an obvious catalyst for growth, there isn't much reason to race into trucking stocks right now.