Key Highlights

● Fuel, purchased transportation and insurance costs grew faster than J.B. Hunt's top line.

● Operating income edged up to $247.1 million on revenue of $3.68 billion.

● Revenue excluding fuel surcharges was $3.01 billion, against $3.68 billion in total revenue.

● Fuel also weighed on American Airlines, which faces about $1 billion in added fourth-quarter costs.

The cost squeeze

J.B. Hunt Transport Services (NASDAQ:JBHT) closed Friday's session at $228.78, down on the day, according to market data, putting the stock among the decliners on the Dow Jones Transportation Average. The catalyst was a set of third-quarter results, released after Thursday's close, in which expenses grew faster than the company's strong top line.

According to market reports, three cost lines did the most damage. Fuel expense soared, purchased transportation, which covers the money J.B. Hunt pays rail partners and third-party carriers, jumped, and insurance and claims costs climbed steeply. The combination left operating income only slightly higher at $247.1 million despite revenue rising to $3.68 billion. The operating margin narrowed from the prior year.

Diluted earnings came to $1.82 a share, up from $1.76 a year earlier, but the result missed the $1.86 consensus, market reports said. Net earnings were $172.4 million.

Why fuel matters now

The timing of the fuel spike has been painful for transport companies. Brent crude climbed $3.94 on Friday to settle at $109.86 a barrel, its highest close since May 19, as Iran escalated attacks on tankers in the Strait of Hormuz. West Texas Intermediate traded above $101 intraday. US gasoline averages $4.33 a gallon, compared with $3.06 a year ago.

Carriers typically recover part of their fuel costs through surcharges passed on to customers, which helps explain why J.B. Hunt's reported revenue rose faster than its revenue excluding fuel surcharges, which came to $3.01 billion. But surcharges often lag actual costs, and they do nothing to offset rising insurance and claims expenses, which have been a persistent challenge for the trucking industry. Large claims tied to road accidents and the rising cost of coverage have pushed up premiums for many carriers in recent years.

Segment results showed where the pressure landed. Intermodal revenue reached $1.83 billion with operating income higher, while Dedicated contract services generated $960.2 million but saw operating income fall. The company plans price increases, according to market reports.

Context for the transports

J.B. Hunt had issued a Sept 16 pre-announcement warning of a sequential decline in profit, after which Barclays cut its price target to $285 and BofA to $302, per market commentary. Fuel was also hurting other transport names on Friday: American Airlines (NASDAQ:AAL) faces about $1 billion in added fourth-quarter fuel costs, according to a published report, which said United Airlines (NASDAQ:UAL) and Southwest Airlines (NYSE:LUV) are trimming capacity.

The broader market fell. The S&P 500 lost 84.62 points to 7,659.44, the Dow Jones Industrial Average slipped 175.28 points to 52,002.41, and the Nasdaq Composite dropped 572.99 points to 26,140.03. Energy was the best-performing sector. The Dow Transportation Average, which tracks 20 major US airlines, railroads, truckers and logistics companies, is often watched as a barometer of the freight economy, and Friday's pressure on carriers came as fuel costs climbed sharply. The 10-year Treasury yield eased to roughly 5.1, and Fed Chair Kevin Warsh said, "I don't prejudge meetings."

Hunt Peers Compare Fuel and Insurance

Peers report next week. CSX (NASDAQ:CSX) and Knight-Swift (NYSE:KNX) report Oct 21 after the close, and Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC) report Oct 22 before the open, offering comparisons on fuel and insurance costs across rail and trucking. United Airlines reports Oct 20 and Southwest Oct 21. The Fed's next rate decision is Oct 28.

For J.B. Hunt, the key questions are whether price increases stick with customers and whether oil prices ease.