The Tranports Are Lagging But That May Be About To Change
The transports have been lagging the market all year. While the broad-market S&P 500 (SPX) and Dow Jones Industrial Averages posted gains in the range of 30% the Dow Jones Transportation Average moved sideways. Generally speaking, this is not good news for Dow Theorists, they like to see the indices confirm each other and that’s not happening. At least not yet.
The good news is that the situation may be changing. The Transportation Average made a significant 5% move over the last two weeks that points to higher prices later this year. The bad news is that weak results from JB Hunt (JBHT) are clouding the picture. JB Hunt is a key player in the intermodal and trucking industry. Along with many other services, JB Hunt is a leader when it comes to moving shipping containers from the ship and delivering the contents when and where they belong.
The Transports Are Breaking Out, And New Highs Are In Sight
The technical outlook for the Dow Transports is very bullish with one caveat, the all-time is very very close at hand. The all-time high is only 2.5% away from Thursday’s closing price and momentum is bullish; there is a high probability the index will move up to that level. The question is whether it will break through and continue higher.
Based on JB Hunt’s earnings report this morning that may not happen. The company’s stock shed 4.0% on news of tepid growth and lower revenue per load, if that becomes the trend of earnings this season the DJT could be in for a big reversal. After looking at the data, what it may come down to once again is an outsized market expectation in the face of economic headwinds.
JB Hunts revenue grew just over 5.0% for the quarter, not too bad, and only fell shy by 0.5%.
The EPS end was a little shakier, GAAP earnings of $1.35 fell shy by $0.14, as the operating ratio increases but still, there are other positives to be found. On a segment by segment basis Dedicated Contract Services rose 20% and Integrated Capacity Solutions by 9.0%. DCS growth was fueled by acquisitions and organic growth, ICS by load growth and favorable client mix.
The weakness was in Trucking. Trucking revenue, as a segment of the business, fell 20% from the year-ago period as volumes and revenue per load-mile decreased. While not good news, there is a silver lining. Analysts Bascome Majors at Susquehana issued a report that says a melt-up in trucking rates is brewing. According to him, volumes are on the rise and fleet-availability is shrinking and that will drive rates higher this year.
Acquisition Targets Are Out There
JB Hunt has not made it a secret it is looking to grow through acquisitions and there are targets to be found. XPO Logistics (XPO) just announced it was looking at strategic alternatives that include spin-offs, divestitures, and outright sale of the company. XPO Logistic’s footprint is global so it is unlikely JB Hunt would buy the entire package. JB Hunt might want part or all of XPO’s North American divisions but we’ll have to see.
XPO has hired JP Morgan and Goldman Sachs to assist with the review. Analysts at Jeffries gave the move a big thumbs up. They say the stock could soar if XPO management makes the right moves. They estimate a 30% to 60% upside could be achieved depending on the final decisions.
The Technical Outlook
The JBHT chart is bullish but resistance at a long-term high is keeping the stock from moving higher. Today’s news pushed prices down more than -4.0% in early trading, putting them in a position to open below the short-term moving average where bears could take control. The key area to watch will be support at $111.50, if price action moves below there a deeper sell-off in this stock may be brewing.
So far, $111.50 has been a strong level of support so I do not expect it to fail unless there is a broader weakness in the transportation sector. Stiefel expects earnings beats to outnumber earnings misses: if that is the case JB Hunt will get a boost from the rising tide and move higher in 2020.