J.B. Hunt does not usually give intra-quarter guidance. On Wednesday its chief financial officer, Brad Delco, told the Morgan Stanley Industrials conference that third-quarter earnings would fall five to ten percent from the second quarter. The stock dropped 13.3 percent, one of its worst days since the 1983 flotation, and dragged Old Dominion, Knight-Swift, XPO, Schneider, Landstar and RXO down with it.
The arithmetic is unusually clean. Roughly $25 million of additional driver-related costs, covering recruiting, marketing for applicants, onboarding, training and signing bonuses. At least $10 million more from fuel, with diesel at a record $6.31 a gallon against around $3.70 a year ago, up ten percent from July to August alone and rising in eight of the quarter’s first eleven weeks. Delco called them some of the most radical and abnormal swings in fuel prices he has seen in his career.
But the cost increase is not really the story, because everybody in freight is paying the same diesel price. The story is the clause underneath it.
Intermodal and dedicated contract services generate 96 percent of J.B. Hunt’s operating income, and both reprice more slowly than over-the-road trucking. Delco named the problem exactly: there is a mismatch, based on the delay in pricing, between what intermodal charges and the costs being felt now. Intermodal bid season opens in October, with roughly ten percent of contracts up for renewal in the fourth quarter. The company has said it will not push through out-of-cycle rate increases, betting instead on bid season to catch up.
That is the whole thing. Costs move weekly. Prices move annually. The gap between those two clocks is where a quarter goes.
Any cafe with a wholesale book understands this in the bones. Your retail counter can reprice on a Tuesday morning with a stick of chalk. Your office contracts cannot. You signed a twelve-month rate with four businesses last November, and when green coffee and freight moved in March you carried it, because the contract said you would, and because going back to a customer mid-term to ask for more is a conversation that costs more than the money.
So you wait for renewal. And in the meantime the counter subsidises the contracts, which is a thing almost nobody models and everybody does.
The strategic question this raises is one worth sitting with, because J.B. Hunt is answering it deliberately and paying thirteen percent to do so. Intermodal currently runs about 32 percent cheaper than truckload, well below the ten to fifteen percent discount typical in the East and 25 percent in the West. The company could go and claw that back out of cycle. It has chosen not to, protecting the contractual relationship and taking the margin hit into the bid season instead.
That is a defensible choice and it is the same one the roaster makes. A customer who learns that your price can move mid-term learns something permanent about what your signature is worth.
Delco’s framing was that volumes should improve sequentially and that it really is more of a timing issue. The market took the timing at face value and marked the stock down anyway, from a position 41 percent up on the year going into Wednesday.
Diesel moves on a Tuesday. The contract moves in October.
Source: The Motley Fool, “Why J.B. Hunt Stock Dropped Today”
