June 14, 2023

J.B. Hunt still waiting for market recovery


Management from J.B. Hunt Transport Services said Wednesday that overall demand continues to be subdued. However, it noted some areas of strength in the market.

“We have a few pockets where it’s getting a little bit better,” President Shelley Simpson said during an appearance at a Wells Fargo (NYSE: WFC) investor conference in Chicago.

She noted that the market hasn’t worsened since the company’s first-quarter call in April but that more data was needed before the company could call an end to the downcycle. “We couldn’t call whether the freight recession is going to end this month or three months or six months.”

Intermodal traffic moving on the U.S. Class I railroads is off 12% year over year (y/y) so far in the second quarter, according to the Association of American Railroads. Following a 21% y/y decline in U.S. container imports in April, volumes are expected to be down 23% in May and 15% in June, according to the National Retail Federation’s Global Port Tracker.

However, J.B. Hunt (NASDAQ: JBHT) has been taking share, outperforming the broader intermodal markets in recent quarters.

Management noted that rail service has improved, especially in the East. There has also been some improvement in the West, but volumes have been under pressure there due to labor concerns, which may be aiding the service metrics. Simpson said the railroads have taken a more customer-focused approach as they toggle away from cost-cutting and precision-scheduled-railroading initiatives.

Softer demand is certainly weighing on the segment currently, with management noting that “there has been pressure on price” across all modes except for dedicated. Intermodal bid season starts every October, so all contracts for the recent cycle will be reset by the end of the third quarter. However, most of the rate changes will be in place by the end of the second quarter.

“We’re not certain when we’re coming out of a freight recession, but certainly prices are resetting. … Prices will be different in Q3 than what they have been here in the first half of the year,” Simpson said.

Intermodal revenue per load was 1% higher y/y in the first quarter and flat excluding fuel surcharges.

Simpson acknowledged that there may be too much intermodal capacity in the market currently but said that the company’s decision to expand its container fleet to 150,000 units doesn’t and won’t impact the way it prices loads. She said the longer-term outlook for the mode, predicated on highway-to-rail freight conversion, necessitates the additions.

The company is also having success blending its drop-trailer services with its intermodal offering. In the past, many shippers were relying on trucks solely to move those trailers to and from their sites. However, J.B. Hunt has been successful converting some of those loads to the rails. Management said drop-trailer service is a $200 billion market with less than 10% of shipments being executed on the rails currently.

The company didn’t provide any commentary around bid compliance but recently said it was only in the high-50% range, which is an all-time low. In the last cycle, the company saw more than 80% of contractually committed volumes show up on its network.

J.B. Hunt’s intermodal segment accounted for 47% of total revenue and 60% of operating income in 2022.

Management also noted headwinds in its other segments.

It said brokerage has been the most impacted through the downturn and it is still a little overexposed to the spot market. However, that is being cured in the current bid season.

Final mile is seeing softness in demand. Shipments of appliances are down modestly and furniture-related freight has dropped dramatically. Management said it is taking share in the exercise equipment delivery market and that deliveries into off-price retail locations have picked up.

The company’s pipeline of potential new dedicated accounts has increased although management said contract decisions (normally 18 to 22 months) are taking longer and its win rate is down. New contract wins in 2023 aren’t expected to materially change J.B. Hunt’s dedicated fleet size as daily equipment needs within existing accounts are down modestly.

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