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

J.B. Hunt Transport Services reported on Wednesday that near-term cost pressures are outpacing pricing gains, causing a 12% decline in the company's shares. At an investor conference, executives warned that this could lead to a sequential 5% to 10% drop in earnings per share (EPS) for the current period. The primary reasons for this are the sharp increase in diesel fuel prices and higher driver-related expenses.

The company estimated a $25 million increase in driver-related costs, including recruiting and bonuses, and at least a $10 million sequential fuel headwind. Diesel prices have surged 10% from July to August and have kept rising through September, with eight out of the 11 weeks in the third quarter showing increases.

Management stated that the cost inflation is "more cyclical than structural," and that higher driver costs reflect a robust freight market. They also noted that the near-term headwind will eventually become an earnings tailwind when prices normalize. J.B. Hunt earns 96% of its operating income from its intermodal and dedicated units, which are slow to capture rate changes, making this a timing issue rather than a structural problem.

The intermodal contract pricing typically 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.

Intermodal contract savings are currently 32% cheaper than truck, which is significantly higher than the typical 10% to 15% discount in the East (approximately 25% in the West). The company sees an opportunity to close this gap during the upcoming bid season, but they will not make "out-of-cycle" rate hikes to avoid negative impacts on customer relationships.

Despite record fuel prices and elevated truck rates, FreightWaves reported that J.B. Hunt sees strong demand for its services, with final-mile being the only outlier. The company remains focused on yield rather than price until margins are restored.