JB Hunt shares down 13% 📉 US transportation stocks have problems?

J.B. Hunt Transport Services (JBHT.US) shares are down more than 13% today after CFO Brad Delco warned that the company’s third-quarter earnings could fall by 5-10% compared with the previous quarter. The main pressures on results are sharply rising fuel prices, higher financing costs and expenses related to increased hiring. J.B. Hunt is one of the largest U.S. transportation and logistics companies, providing trucking, intermodal and supply-chain services. A particularly important part of its business is intermodal transport, which combines rail and truck freight. However, J.B. Hunt is not the only company under pressure, as the broader U.S. transportation sector has also struggled recently, with high fuel prices weighing on operating costs at companies such as United Parcel Service (UPS) and FedEx. The selloff shows that investors are increasingly concerned that costs are rising faster than transportation and logistics companies can raise prices for their services.

• Management expects third-quarter earnings to decline by 5-10% q/q, while analysts had previously forecast EPS of $2.09, implying growth of around 19% y/y.
• U.S. diesel prices have risen above $6.30 per gallon and are more than 70% higher than a year ago, significantly increasing the carrier’s operating costs.
• The lag between higher fuel prices and passing those costs on to customers through fuel surcharges is expected to weigh on third-quarter results by around $10 million.
• Expanding operations requires additional driver hiring, with related costs expected to be around $25 million higher in Q3 than in Q2.

Fuel prices are hitting margins

The sharp rise in diesel prices has become one of J.B. Hunt’s biggest challenges. CFO Brad Delco described the recent swings in fuel prices as some of the most unusual and extreme the company has experienced in its history.

The problem is not only the absolute level of fuel prices. J.B. Hunt uses fuel surcharges to pass part of the additional cost on to customers, but this mechanism works with a delay. When fuel prices rise quickly, there is therefore a period in which the company’s costs increase faster than its revenue.

According to management, this mismatch alone could add around $10 million to third-quarter costs.

More intermodal demand also means higher costs

High fuel prices may at the same time increase demand for intermodal transport, which combines rail and trucking, as some long-haul road freight is shifted to more fuel-efficient rail transport. In theory, this is positive for J.B. Hunt, which has a strong position in this segment.

To handle stronger demand, however, the company is hiring more drivers. Management estimates that these expenses will increase third-quarter costs by around $25 million compared with the previous quarter.

This creates a short-term paradox: stronger demand may improve the company’s business outlook, but preparing to serve that demand first puts pressure on profitability.

Higher bond yields add another headwind

Another source of pressure is elevated bond yields. They increase the company’s financing costs and also raise the discount rates investors use to value future cash flows.

For a capital-intensive transportation company that must invest in fleets, equipment and infrastructure, a higher cost of capital matters directly. Combined with more expensive fuel, this creates a less favorable environment for margins.

The market had expected a much stronger quarter

Management’s warning contrasts sharply with relatively strong Wall Street expectations. Before the CFO’s comments, consensus estimates pointed to third-quarter EPS of around $2.09, which would have represented growth of 19% compared with the previous year.

The prospect of earnings falling 5-10% compared with the second quarter therefore changes the narrative that had recently centered on improving profitability. The size of the gap between previous market expectations and the company’s new guidance helps explain a large part of today’s double-digit decline in the stock.

Source: xStation5