What Went Wrong With J.B. Hunt Transportation Services (NASDAQ:JBHT)?

J.B. Hunt Falls Hard After Mixed Quarter

Shares of J.B. Hunt (NASDAQ:JBHT) made a strong bounce the first two weeks of October. The stock rose 13% in two weeks and came close to setting a new all-time high because of a bullish outlook driven by rising tailwinds. The company just reported for the calendar 3rd quarter and shares fell more than 7.0% because of it. The company beat on the top line and missed on the bottom line, a mixed report to be sure, but those very same tailwinds are still in place. If there is a question to be answered now it’s what went wrong and what does this mean for investors now?

The tailwinds I speak of are the combination of rising demand within the freight industry and tight conditions within the freight market. The industry has been consolidating over the past few years, driven in part by overcapacity, and along with it is a reduction in capacity. Now, with the economic rebound underway and eCommerce a driving force of that rebound, the need for shipping solutions is on the rise, and capacity is having a hard time catching up. The need for drivers is dragging on business while rising wages and recruitment efforts cut into profits.

J.B. Hunt Beats On The Top Line, Earnings Fall Short

J.B. Hunt’s 3rd quarter results underscore trends within the industry. The company’s revenue grew by 4.7% to top consensus by 4.7% evidence of underlying strength and growth within the industry. J.B. Hunt is an integrated shipper so it is important to break out the segments and it is nearly all good. The top-line results were positively impacted by a 25% increase in revenue per load in Integrated Solutions; a 35% increase in the number of stops in the final mile segment (read more delivers, more business); and a 9% increase in the number of dedicated loads. Revenue was partially offset by a -5% decline in Intermodal and -32% decline in fuel surcharges.

The bottom line is where things get sticky. The company was expected to post earnings close to $1.30 but fell short by $0.12. EPS is up more than 7% from the previous year but severely impacted by rising costs. Among them are higher rail costs which impacted margins in the ICS segment, rising wages for drivers, higher recruitment costs, and spending on technology. The company cut back on other spending, however, such as the buyback program and was able to increase its cash position by 16% to $319 million while maintaining stable debt levels. The buy-back program is still worth $520 million

Looking forward we can expect for J.B. Hunt’s revenue to continue to rise in the mid-single digits for the next couple of quarters at least. Earnings will also continue to grow but be impacted by rising costs. The company’s ability to manage those costs will be important because it doesn’t look like any of those costs are going away anytime soon.

J.B. Hunts Dividend Is In No Danger

J.B. Hunts is a very reliable dividend payer and dividend grower although the yield is not enough on its own to keep the market interested. Even with today’s plunge in prices the stock is still only paying about 0.75% but there is a high expectation for future growth. The company has been increasing the payout for 16 years with the 17th expected during the 4th quarter reporting cycle. The payout ratio is a cool 22% so no worry there. The balance sheet hs some debt but it is under control with ample cash, coverage, and free-cash-flow.

J.B. Hunt Delivers Another Buying Opportunity, or Not

Shares of J.B. Hunt are down hard in the early premarket session but I think this is just another buying opportunity in the trucking industry. The tailwinds are in place to drive the sector and this stock higher albeit there are some headwinds to battle as well. The good news is that the tailwinds are stronger than the headwinds, and some of the headwinds should abate with time (recruiting and tech-spend). As for the technical outlook,it really depends on what the market does with this stock now. If price action finds support at this level and moves higher J.B. Hunt will probably retest the recent high and set new highs very soon. If the stock falls from here we may see a retest of $125.