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J.B. on the rocks?

J.B. On The Rocks?

Operating Ratio Continues Eight-Year Negative Trend, Cutting Into Net Earnings For Carrier

A mention in The New York Times. The front page of The Wall Street Journal.

The cover of Arkansas Inc.

That's a lot of recent press coverage for J.B. Hunt Transport Services Inc.

Amidst all this primarily favorable media and an upbeat stockholder's meeting last week, one trend at J.B. Hunt hasn't gotten much attention: J.B. Hunt's operating costs' ratio has risen steadily since the company went public on the over-the-counter market in 1983.

The result? An ever-diminishing ratio of net profits to gross revenues as the cost of running J.B. Hunt takes a bigger and bigger bite out of each dollar earned.

While J.B. plays down the incessant squeeze on net earnings, it continues.

Consider that in 1984, J.B. Hunt's operating ratio was 75.9. Seven years later, in the first quarter of 1991 -- after years of climbing steadily -- operating expenses ate up 94.3 percent of revenues, a new high.

Net earnings in that first quarter -- after taxes and interest -- fell to only 2.5 percent, a new low.

Faced with this earnings crunch, J.B. Hunt has launched new ventures and sought out new markets, but they are as yet unproven.

For example, Quantum, the bimodal venture with Sante Fe Railroad, is profitable, but new shorter haul and flatbed operations are unmapped highways for the trucking company.

As the new operations' cumulative effect on margins and company expenses for the remaining quarters of 1991 are tracked, will the operating ratio trend line continue to rise, or will it finally turn down?

Analysts Speak

Ginanne Long, a Stephens Inc. analyst, says, "The first quarter of '91 was something of an anomaly (for Hunt). They've added a lot of infrastructure. Fuel costs, driver pay ... all of these are going against the operating ratio."

The increase in driver pay occurred last fall, about the time employees moved into a new 150,000-SF building. Bulldog, a Georgia-based short-hauler, was acquired in October 1990.

In her research report, Long predicts Bulldog will turn profitable in the second quarter of this year. She says the new flatbed division should pass break even in the third quarter of '91.

Long points out that in the mid-1980s, when margins looked better at the company, they were helped by lower fuel prices and the shutdown of refrigerated and owner-operated businesses.

"They are trying to get control of their overhead," she says. But, "When do you have to add another building? As you add businesses, new areas, can you hold down overhead?"

"They haven't been able to offset inflationary increases," says Grame Lidgerwood, a transportation analyst with First Boston in New York.

She attributes the rising operating ratio to a driver shortage and climbing workmen's compensation insurance rates. "While the accident rate at Hunt has not grown, the size of the claim has gotten larger," she says.

"They're facing the reality that it's going to be awfully hard to compete with railroads," Lidgerwood says.

She speaks favorably of Quantum, the year-old, innovative venture with Sante Fe Railroad. Hunt puts its trailers on tracks, instead of highways, when it makes economic sense to do so. This and Hunt's other new ventures will "enable them to be full-service providers."

The Industry Picture

It's a bit difficult to compare J.B. Hunt's ratios to other full truckload transporters because most of them are privately held. Werner Inc. of Omaha, Neb., and M.S. Carriers of Memphis, Tenn., however, are public.

Werner had an operating ratio of 89.2 percent on sales of $305 million for its fiscal year 1990 ending in February.

M.S. Carriers' 1990 operating ratio was 89.4 percent on sales of $124 million. On first quarter 1991 sales of $34 million, the ratio rose to 91.3 percent.

These all best J.B. Hunt's 90.2 percent operating ratio for 1990 on sales of $580 million and a 1991 first quarter ratio of 94.3 percent on sales of $158 million.

However, one analyst suggests if we knew the ratios of the privately held companies, they would fall between 95-98 percent. David Guthrie with Morgan Keegan says the pinch on net earnings is an industry trend, not one affecting just J.B. Hunt.

J.B. Hunt agrees.

In the most recent letter to shareholders, management says: "Clearly, the margin erosion stems from inflationary cost increases without commensurate increases in freight rates. ... Obviously, freight rates have been subsidized through the narrowing of carriers' margins."

If rate increases can be implemented successfully, perhaps Hunt can stall its climbing operating ratio, but expenses must be minimized.

Looking to the future, Long says, "They've got the middle management in place, and the computer system, etc., for another $200 million or so. They need to just grow the company and hold the line. At 90 percent or 92 percent they throw off cash like mad."

PHOTO : HUNT "CLASSIC": The full truckload, dry van carrier operation is still the mainstay of Hunt's business, although the company believes new ventures will contribute to the bottom line.
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Title Annotation:J.B. Hunt Transport Services Inc.'s rising operating costs' ratio
Author:Ford, Kelly
Publication:Arkansas Business
Date:May 20, 1991
Previous Article:Hot off the grill.
Next Article:Recession takes toll?

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