As retail investors, we don’t have the luxury of paying tens of thousands of dollars for market research available to institutional investors or investment banks. So, how does one sitting in their basement figure out what is happening in a particular industry? As I will show you in this article, it is quite easy and doesn't take much time either. All one has to do is read the earnings call transcripts of the leading companies in the said industry. Simple.

One of the best industries to analyze to help decipher the state of the economy is freight. If stuff is moving and the intermodal and dedicated freight companies are thriving, the economy is doing fine. However, if the freight industry is hurting, all is not good in the economy.

To that effect, I will highlight some of the commentary from J. B. Hunt’s (JBHT) recent earnings call. Along the way, I will have some fun with some of JBHT’s accounting.

Margins, Margins, Margins

If there is no margin, there is no business. Healthy operating margins define a company’s net income and thus its cash from operations. A healthy cash from operations allows for CAPEX, thus enabling and fueling future growth. Look no further than the MAG 7 to understand the concept. MAG 7 spends 60% of cash from operations on R&D and CAPEX. The results are there for everybody to see.

Now let’s see what JBHT has to say on the margin front.

Shelley was certainly in a good mood. One can’t get any more blunt than that. There are clearly pricing pressures and customers are unwilling to raise prices and play ball. You thought Shelley was being blunt? Check this out.

Now bankruptcies are happening in the freight space, however, it seems they are not happening fast enough. Then, there could be a possibility of deep-pocketed smaller players trying to wrestle away market share, but undercutting competition while operating at rates below cost is never a long-term winning strategy. Whatever the case, how long has this been going on?

With the lockdowns, working-from-home trend, inflation, and reopening over the last four years, it is not surprising that JBHT’s customers have had a tough time forecasting changing consumer behaviors and trends. Since Shelley said four years, let’s look at the yearly income statement highlights till the end of 2023.

It's quite a rollercoaster here. JBHT was hauling stuff even during lockdowns, so they were not impacted. However, what stands out is the fall in revenue in 2023. With everything back to normal, that seems a little out of place and certainly would have been a red flag heading into this year.

JBHT was consistently having issues with controlling its SG&A and from time to time got bit by its Depreciation & Amortization schedule. Also, operating margins are abysmal. Gives JBHT hardly any room to maneuver and forces them to focus on managing cost and working capital. No wonder JBHT’s management was being so blunt. However, let’s look at the recent quarters as the commentary from JBHT is from Q3.

The numbers and commentary speak for themselves. That said, what has JBHT been up to going into Q4?

Some Jugglery

Pushing Sales to the Next Quarter

One of the best ways to juice up revenue is to push end-of-quarter sales to the next quarter. You would be surprised how common this is.

During regular business, such events do happen. This will give a slight boost to Q4 revenues.

Useful Lives of PPE

For a company like JBHT with so much PPE (Property, Plant, and Equipment), the first thing I search for in a 10K or 10Q is “depreciation”. The intention is to see if the depreciation schedule has been changed. Simplistically, if a company increases the useful life of some or all of its PPE, that reduces the Depreciation Expense, this helps boost EPS. So, what has JBHT done lately?

If not for that change - not fully quantified - the depreciation and amortization expense would have been higher, and the reported EPS would have been worse. Magic, right? It should be noted that these decisions are up to management’s discretion and it is for the auditor to judge the validity of the change. That said, I wanted to know when they made this change. This language was there in Q1 and Q2 2024 10Qs, however, it was missing from the 2023 10K. Waste Management got in trouble for playing around with the useful lives of their trucks over a decade ago. In my opinion, this is not a good look without a proper explanation.

How About Those Taxes

The small little move with useful lives protected the Operating Margin. Now, how about giving the Net Income a little boost?

Let’s do some math here. Effective Tax Rates per Quarter and for full year 2024:

• Q1 = 28.7%

• Q2 = 26.8%

• Q3 = 25.2%

• Q4 = x

• Full Year = 24.5%

(28.7 + 26.8 + 25.2 + x) / 4 = 24.5 or x = (24.5 * 4) - (28.7 + 26.8 + 25.2) = 17.3

Hence, the effective tax rate for JBHT in Q4 2024 would be 17.3%. That implies less tax expense and viola, the Net Income just got a nice little boost. Wait!!! What happened here? The tax expense reported in the Income Statement is a guesstimate and is not the same as the taxes paid to the IRS. This gives management leeway to play around with the tax rate. In this case, JBHT front-loaded the tax expenses and will benefit from a lower tax expense in Q4.

Now, sprinkle in some share buybacks and we have a nice EPS boost and who knows, a mega earnings beat coming.

Hello FCF

There is this crowd that focuses on FCF (Free Cash Flow). Now that Net Income is in the bag and hence the cash from operations, why not take care of FCF too?

One may say that JBHT was being conservative with its CAPEX guidance and as facts have evolved they decided to change it. Irrespective of the intent, JBHT just got a $25 million to $75 million FCF boost. Unless operationally something drastically goes wrong, I expect a massive earnings beat in Q4 along with a happy FCF following investor base.

Looking Ahead

While there is some positivity in those statements, the concern is that the issues will not get fully resolved this bidding season.

This indicates that the freight recession might linger longer than most expect unless there is a sudden surge in bankruptcies and/or pricing improves. JBHT better hope the situation improves soon otherwise it might have survival issues.

Given what we have discussed, I would stay as far away as possible from the freight space and JBHT. Why are people paying a P/E of ~33 for JBHT? Also, the economy might not be as strong as many believe.