Is JB Hunt's (JBH) disappointing earnings report a sign of an upcoming recession?

NASDAQ: JBHT | J.B. Hunt Transport Services, Inc. News, Ratings, and Charts

JBHT – Hunt reported weaker than expected earnings and the stock was down 4.8% to $100.41.

The Dow Theory is a trend following idea that helps investors predict future stock prices. Other interpretations of the theory have emerged over time. Some investors, for instance, look at the transport subindex to tell them something about the health of the U.S. economy. If transportation—the blood vessels of the economy—is humming along, the patient (to extend the analogy) must be healthy too.

The Dow Jones Transportation Average is up 18% year to date, better than 13% gain in the Dow Jones Industrial Average. That’s a good sign for investors. But the results from logistics giant J.B. Hunt Transportations Services (ticker: JBHT) Monday night creates a new paradox. Hunt reported weaker than expected earnings and the stock was down 4.8% to $100.41 in Tuesday afternoon trading. So, is the strong year-to-date performance of the transportation sector a sign that things are getting better or are Hunt’s earnings a signal that economic growth is faltering?

The back story: Analysts expected Hunt to earn $1.25 a share for the first quarter of 2019. The company reported $1.09 a share, 12.6% below Wall Street expectations.

“In Intermodal, volume or lack thereof is obviously the main story. We expected it to be down from a reasonably strong first quarter 2018,” said CEO John Roberts adding, “the service disruptions from weather issues starting in late January and progressing through late February actually caused some freight to revert to the highway, in addition to loads being outright canceled.”

Intermodal refers to a shipping modality in which freight travels part of the way on low-cost rails and part of the way on higher-cost trucks. Intermodal shipping is growing faster than the overall economy because it offers a way for shippers to lower total logistics costs.

What’s new: Blaming weather is something that makes investors and analyst wary. And there are other problems with the company’s update.

“[Hunt’s] shortfall was also reflective of soft industry volume conditions in early 2019 that linger in [the second quarter] and continued deceleration in contractual pricing growth with limited visibility to the timing of a trough in growth rates,” writes Baird transportation analyst Ben Hartford. He is cautious on the trucking sector because slower pricing growth is a bad sign for demand.

Typically, trucking companies need positive pricing gains to offset wage increases. A lot of the cost of operating a logistics company is people—driving trucks and loading assets.

Looking ahead: Hunt expects things to pick up in the second half of 2019. That is another dog-whistle for investors—when companies say things will be better just down the road. It could be true, though. Investors will get another logistics update Tuesday night from railroad company CSX (CSX). Analysts expect CSX to earn 91 cents on $3 billion in sales for the first quarter.

If CSX slips, then the bad news could put U.S. stocks in limbo. Sell in May and go away as the saying goes. But if other companies are more definitive about pricing trends then all stocks, including Hunt, can gain more as economic data improves.

The Dow Transportation Average is trading at 15.4 times estimated 2019 earnings, close to its historical average and just below the price-to-earnings ratio of the broader market.

J.B. Hunt Transport Services Inc. shares were trading at $101.26 per share on Tuesday afternoon, down $4.24 (-4.02%). Year-to-date, JBHT has gained 9.10%, versus a 16.70% rise in the benchmark S&P 500 index during the same period.

JBHT currently has a POWR Rating of C (Neutral), and is ranked #7 of 19 stocks in the Trucking Freight category.

This article is brought to you courtesy of MarketWatch.

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