March 21 (Bloomberg) -- The rail-truck industry is poised for a second-quarter rebound after harsh weather caused a decline in shipments.
Total U.S. intermodal volume -- goods shipped by more than one means of transportation -- rose 6.3 percent in the four weeks ended March 14 compared with a year ago, according to figures from the Washington-based Association of American Railroads. Shipments have increased since mid-February when they contracted 0.8 percent, the biggest decline in almost two years.
More favorable weather has helped this type of freight get back on track, said Malcolm Polley, president of Stewart Capital Mutual Funds in Indiana, Pennsylvania. For investors who believe a further increase in consumer spending and intermodal activity is coming, J.B. Hunt Transport Services Inc. -- the largest publicly traded company in the industry -- is “as close to a pure play on this thesis” as they can get, he said.
The Lowell, Arkansas-based carrier, which generates more than 75 percent of operating income from its intermodal business, is bracing for a springtime recovery after a slower-than-expected first quarter, Terrence Matthews, president of the intermodal division, said in a telephone interview. Volumes probably will rebound to be in line with -- though at the lower end of -- its full-year forecast of 10 percent to 15 percent gains, he said. J.B. Hunt is scheduled to announce results for the January-March period on April 14.
The recent rise in volumes reflects “some optimism,” which bodes well for the broader economy, said Charles Clowdis, managing director of transportation-advisory services at IHS Global Insight in Lexington, Massachusetts. That’s because consumer goods such as electronics, clothing and furniture make up as much as 72 percent of containerized freight, he said.
Demand probably will pick up in a “real way” in April, though volumes could be challenged as the carriers “dig out of the network congestion hangover” from the first quarter, said John Mims, an Arlington, Virginia-based analyst at Friedman Billings Ramsey & Co. “Bad weather has been masking what is otherwise a fairly decent demand environment.”
Volumes probably will increase this year even after the sluggish start, which is why Mims maintains an outperform recommendation on J.B. Hunt. Still, the “lingering question” is how quickly activity returns to the pace of the late fall, he said.
Total intermodal shipments grew at a four-week average of 7.4 percent from a year earlier in October and November, based on the Association of American Railroads figures. That compares with gains of 3.5 percent in December-February.
Weather-related disruptions in January and February created a backlog, with some shipping companies “thousands of loads behind schedule and still playing catch-up,” according to Matthews. Industrywide, the post-holiday momentum “almost came to a stop” as several blizzards gripped the country, Clowdis said.
Truckers picked up some of the slack intermodal carriers couldn’t transport, though a “very real” shortage of drivers has led to a capacity shortage and higher shipping rates for transporting goods by truck alone, Matthews said. That’s good news for J.B. Hunt, as the company is “more positive on the pricing outlook in intermodal than this time last year.”
The ability to boost prices is one reason why Mims is a “big bull” on the carrier. Any increase would spur investor interest after J.B. Hunt has trailed the Standard & Poor’s 500 Index, falling 6.6 percent since Nov. 29 compared with a 3.7 percent gain for the S&P.
“What gets this stock moving is pricing of 2 to 3 percent on top of low double-digit volume growth,” said Mims, who sees J.B. Hunt outpacing the broader market as the U.S. expansion continues.
The company’s stock has suffered amid the decline in intermodal volumes. This is reflected in a drop for analysts’ earnings expectations this year to $3.30 a share, down from estimates of $3.41 in December, according to Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in New York, which manages about $1.5 billion in assets.
The relationship between this consensus estimate and J.B. Hunt’s stock performance -- both relative to the market -- has broken down recently after tracking closely in the last few years, Polley said. This shows that analysts still are optimistic about volume and price increases while investors are less certain, he said. Buying this stock now is akin to making a bet that “earnings expectations turn into earnings reality.”
Neither Polley’s or Ghriskey’s firms currently hold J.B. Hunt, though Ghriskey closely follows the company and its intermodal competitor Hub Group Inc. because they offer a “great read-through on the health of the domestic economy.”
Gross domestic product will accelerate 3.05 percent in the fourth quarter, according to the median forecast of economists surveyed by Bloomberg. That’s up from an estimated 1.9 percent gain in the three months ending March 31.
Rising transport volumes are a bullish indicator because an increase will benefit shares of related companies and the broader market, Polley said. “These stocks snap back in anticipation of a turn in the economy.”
Meanwhile, hiring figures and retail sales suggest consumers are in “pretty good shape,” Polley said. U.S. employers added 175,000 workers to payrolls in February, which followed six months of upward revisions, Labor Department data show. Retail sales rebounded 0.3 percent last month, after declining 0.6 percent in January, according to Commerce Department figures. Purchases increased an average of 0.3 percent each month in 2013 and 0.4 percent in 2012.
Consumer spending will return to a more normal level this year, though such a bounce-back probably won’t be “raging,” Ghriskey said. That’s partly because there’s no guarantee the slowdown in intermodal volumes was caused solely by bad weather.
Even so, based on his anecdotal channel checks, Clowdis says some pent-up demand is starting to be unleashed. One contact -- a furniture manufacturer -- saw shoppers disappear from showrooms as temperatures dropped, though there’s renewed interest now with milder weather, he said. Similarly, Mims said he’s “still in the camp that the year starts flat and takes a while to recover.”
Investors will monitor how quickly intermodal activity recovers. For Polley, these shipments are a good way to gauge the health of American households “without a lot of other noise.”
“When you start seeing these volumes increase, it’s more of a purer consumer-driven demand story.”
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