J.B. Hunt, Freight Marker (NASDAQ:JBHT) reported a more than 30% decline in operating profit, with its overall third-quarter 2023 results below expectations.
In my previous update on the post-print stock price for Q2 2023, I saw the stock as follows: Volume is still low, so there is considerable value. Moreover, before the launch, the stock price had risen by 12%. The stock price has certainly changed little since that update.
This quarter’s results continue to reflect the freight environment as retailers continue to reduce inventory levels following significant production increases in the prior quarter. Moreover, recent results more clearly show the impact of falling freight rates on his JBHT performance. Despite the more challenging operating environment, the stock continues to trade near the top of its 52-week range. In my view, this ensures that current levels are maintained.
JBHT Q3 Earnings Summary
Total operating revenue for the third fiscal quarter decreased 18%, missing expectations by +$40 million. Driving the decline was overall weakness in all reportable segments. Its largest division, Intermodal (“JBI”), reported a total revenue decline of 15%. However, the most significant impact was on Integrated Capacity Solutions (“ICS”), where segment sales declined 38%, resulting in a 48% year-over-year decline in total sales.
Low sales volumes contributed to the decline in other regions as well. For example, Final Mile Service (“FMS”) experienced a 20% decrease in stops during the quarter.
On the positive side, JBHT’s JBI and Truckload (“JBT”) division saw volume growth of 1% and 6%. However, the 16% decline in total revenue per load more than offset JBI’s volume strength.
Dedicated Contract Services (“DCS”) provided a cushion against the revenue declines experienced in other segments, although on a negative basis itself. Total revenue for the quarter was down 4%. Additionally, the number of revenue-generating trucks at the end of the quarter was 370 fewer than the same period last year. But since then, that number has increased by 31 cases. He also maintained a customer retention rate of 94%.
Ultimately, total operating income was down 33%, driven by a 41% decline in JBI. This was due to a combination of wage pressures and equipment maintenance-related costs. Other segments did not perform as well. JBT decreased 48% due to higher expenses, including insurance and costs related to continued technology enhancements. While DCS and ICS were flat, FMS benefited from good earnings, increasing its operating profit by 33%.
Overall, JBHT reported total diluted EPS of $1.80 per share, a few cents below consensus estimates.
Market reaction to JBHT Q3 results
Shares fell more than 3.5% in extended trading after Tuesday’s announcement. The market was probably disappointed by the double miss on both revenue and earnings. The more than 30% drop in profits signaled caution for cautious investors who had remained largely bullish on the stock through 2023.
Leading up to the announcement, the stock was trading at the high end of its 52-week range. The stock is also up 14% year-to-date, with little change over the past month. This compares favorably to the broader S&P (SPY), where the S&P is down 1.5%, at least when measured over a one-month time span.
Outlook for JBHT stock
JBHT is currently suffering from declining profit margins amid an unfavorable freight rate environment. For example, the quarterly operating margin for the second quarter was 8.6%. In the third quarter, it was 7.6%.
Additionally, while the pace of inventory reduction has certainly slowed, it still appears to be a positive trend as many retailers continue to reduce inventory levels ahead of the normally busy holiday shopping season. is. This could further impact his JBHT into the fourth quarter and first fiscal quarter of the new year.
And while Cass Information Systems reported truckload rates did increase from August to September, the increase was only 0.5%. Year-over-year, interest rates are still down more than 20%, a key headwind that contributed to JBHT’s weaker-than-expected performance.
Is JBHT stock a buy, sell, or hold?
Although the results may have been unexpected, there were also some positive outcomes. One is that the DCS segment continues to demonstrate resilience in a challenging operating environment.
In the intermodal business, the largest segment, there were signs of improvement in overall volume. This turnaround comes as JBHT management noted a moderation in inventory reduction trends.
Intermodal President Darren Field said on a conference call that sales volume increased 4% in September from a 1% decline in July. It was also the company’s highest volume week in its history.
Despite the optimism, the current fare environment shows that JBHT remains in a fare recession, weighing on profits at the same time as wages and other costs continue to accelerate.
JBHT President Shelley Simpson emphasized during the conference call that price is a lagging indicator compared to volume, which is considered a leading indicator. this is true. It’s also a turnaround following a quarter in which profits fell 30%.
With the stock near the top of its 52-week range and a forward multiple of 26x, we don’t believe JBHT offers a sufficient value proposition for investors looking for market-beating returns. This is especially true if operating margins are decreasing due to lower freight rates and higher operating costs. A shift to a more bullish stance would require seeing a more pronounced upward trend in the intermodal business. Until then, we continue to think the stock is best left on hold.