It is hard to find a flaw in the way J.B. Hunt is managed, although its latest trading update begs the question as to whether equity valuations across the US trucking and freight industry are actually sustainable.
This is relevant as the capital allocation strategy of all the main players operating in this sector could well have to adjust according to less profitable growth prospects, with a tougher business cycle likely to be the outcome going forward.
The best of its breed, J.B. Hunt makes no exception. Its fourth-quarter (Q4) results, released on 19 January, unequivocally pointed to a solid business, but also one that could find it harder to grow its core offering while preserving underlying profitability, despite the fact that the group broadly met estimates for quarterly and yearly revenues and profits.
Q4 figures in intermodal – its main revenue driver at 57.8% of group’s sales, including fuel surcharges, which rose 9.4% year-on-year – were particularly disappointing, and arguably weighed on the performance of its shares, down 3.7% on the day results hit the wires.
At $998m, intermodal revenues rose in line with US inflation year-on-year, with load growth of 5% being the “primary reason for a 3% increase in segment revenue”, it said, but operating income fell 3% to $124m. Operating income for the unit was responsible for 64% of group EBIT on a quarterly basis.
During the full year, the average length of haul in intermodal was flat at 1,657 miles, while revenue per load dropped to $1,981 from $2,067, and the average tractors during the period grew to 5,222 from 4,949 one year earlier.
Its more profitable, albeit much smaller dedicated contract services (DCS) activities bucked the trend, recording Q4 sales of $398m, up 8% year-on-year, and a 37% rise in operating profit to $57.5m.
It said that DCS “segment revenue increased by 8%, primarily from the addition of new customer accounts, rate increases implemented in the current and earlier periods and improved asset utilisation”.
Meanwhile, the integrated capacity solutions unit experienced a 52% drop in operating income to $6.1m, despite a 22% surge in revenue to $232m. That growth was primarily due to “a 38% increase in load growth”.
Finally, the truck division, which is the smallest in its portfolio of assets, recorded falling revenues at $96m in Q4, down 3% year-on-year, with operating profit down 35% to $6.8m in the last quarter.
For the 12 months ended 31 December, operating revenue growth excluding fuel surcharges greatly outpaced the 4% growth rate in net earnings, despite a lower share count. Based on the same number of shares outstanding, earnings per share would have grown only by 1.75% year-on-year.
Yearly net income margin fell 40 basis points to 6.6%, but operating income margin was down 60 basis points to 11.3%, mainly due to rising rents and purchased transportation costs as a percentage of revenues. Wages and benefits were flat, while fuel and associated tax expenses rose, as expected.
Source: Transport Intelligence, January 24 2017
Author: Alessandro Pasetti
GLOBAL SUPPLY CHAIN INTELLIGENCE (GSCi)