J.B. Hunt Transport Services Inc. (JBHT) remains well established on its growth trajectory given the underlying market trends that auger well for most of its segments, particularly Intermodal and Dedicated Contract Services (DCS).
Despite a looming economic outlook over the near term, we believe the changes in freight transportation market owing to truckload to intermodal conversion will emerge as key growth drivers. These will not only drive solid pricing across all segments but will also foster strong volume growth.
However, we remained concerned about continued decline in the Truckload margin over the past two quarters. Despite a favorable pricing environment in the truck market, we expect Truckload margin to continue declining in 2011.
The company remains exposed to several headwinds such as surging fuel prices, increased compensation as well as insurance and claim expenses due to inflation. In addition, a constrained driver market and costs associated with new driver safety regulations like hours of service and Compliance, Safety, and Accountability Program will prove detrimental for margin expansion this year.
In the recently concluded second quarter, J.B. Hunt’s reported earnings of 53 cents per share were in line with the Zacks Consensus Estimate and improved from 40 cents in the year-ago quarter on favorable pricing mix and volume growth across all segments.
The company’s revenue and operating income also reported a year-over-year growth. The company’s balance sheet projected total debt of $664.0 million versus $617.0 million in the year-ago period as well as cash and cash equivalents of $11 million as against $8 million at year-end 2010. J.B. Hunt‘s capital expenditure was $211 million at the end of first half 2011 compared to $104 million at the end of the comparable year-ago period.
We believe J.B. Hunt is poised to benefit from its two largest segments, Intermodal and DCS, which contributed more than 80% of the company’s total revenue in the second quarter. The company’s Intermodal segment continues to penetrate new markets and gain market share in the east that would in turn provide J.B. Hunt a competitive advantage.
We believe the company’s expansion of service offerings in countries like Mexico, opening of new lanes in the eastern network, cross selling activities with the ICS segment and pricing gains on contract maturities will provide a significant basis for Intermodal’s future growth.
The other segment, DCS is evolving into a highly specialized fleet with greater focus on final mile (i.e., residential) delivery, which is expected to drive double-digit revenue growth in the long term. The company is looking forward to bringing in new equipment and transfer assets from less profitable businesses, thereby boosting fleet productivity.
Given these positive changes, we believe DCS may soon emerge as a $1.0 billion business, generating double-digit operating margins in the coming years. Additionally, it is also focusing on reducing costs through efficient equipment utilization.
However, volatility in fuel prices remains a key concern for J.B. Hunt. The company’s fuel surcharge revenue program enables it to recover the majority of higher fuel costs from customers. However, the company incurs costs when fuel price increases cannot be fully recovered due to engines being idled during cold or warm weather or empty or out-of-route miles that cannot be billed to customers.
The truck industry is highly exposed to self-insured liability. We believe future liability insurance may exceed the historical level and remain detrimental to earnings.
Additionally, the changing environment in the trucking industry due to highway-to-rail conversion also has an adverse impact on the company’s truck segment. J.B. Hunt also remains exposed to competition from transportation and logistics companies like YRC Worlwide Inc. (YRCW) and Con-way Inc. (CNW).
Given the above pros and cons, we are currently maintaining our long-term Neutral recommendation on J.B. Hunt with a Zacks #3 Rank (Hold).
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