J.B. Hunt flags Q3 cost pressures, shares sink 12%

Shares of J.B. Hunt Transport Services fell 12% in early trading on Wednesday after the company issued a warning for its third-quarter earnings. Executives told investors at an event on Tuesday that near-term cost pressures were outpacing the gains in pricing, which could result in a 5% to 10% drop in earnings per share for the current period.

The company cited a significant rise in diesel fuel prices and driver-related expenses as the main reasons for the decline. The warning suggests that J.B. Hunt's EPS for the quarter may be around $1.77, which is almost 16% lower than the current consensus estimate of $2.10. The company also disclosed $25 million in additional driver-related costs and a minimum $10 million sequential fuel cost increase.

Fuel surcharges generally take a week to reflect market changes, and diesel prices have risen by 10% from July to August and have kept increasing in the last few weeks. The company's executives said that the cost inflation is cyclical rather than structural, and the driver cost increase indicates a thriving freight market. They also mentioned that the near-term headwind will turn into an earnings tailwind once the prices normalize.

J.B. Hunt generates almost 96% of its operating income from its intermodal and dedicated units, which take time to react to rate changes, leading to a timing issue. Intermodal contract pricing usually lags truckload pricing by two quarters, while dedicated contracts are mostly five-year deals with annual cost-based price escalators that are less sensitive to market fluctuations.

The company's intermodal bid season commences in October, with around 10% of its contracts renewing in the fourth quarter. The rest of the contracts renew evenly through the first three quarters.

The company's management believes there is a significant opportunity to address the gap in intermodal pricing, which is currently 32% cheaper than truck, a much larger discount than the typical 10% to 15% in the eastern region and approximately 25% in the western region. However, they do not plan to implement any out-of-cycle rate hikes to achieve this, as such actions can negatively impact customer relationships when the market corrects.

Overall, J.B. Hunt continues to witness strong demand across all its businesses, with final-mile being the exception. The company has been gaining market share in intermodal and truckload, but it is concentrating on improving yield rather than volume until margins are restored. Record fuel prices and heightened TL rates are likely to drive more road-to-rail conversions.

The company's dedicated pipeline is at an all-time high. While the third quarter of 2026 may mark the end of a streak of four consecutive quarters of year-over-year margin and earnings improvement, the capacity situation is not easing up, and might even worsen. This situation benefits scaled asset-based operators.