Truckers are facing softening freight markets, with this fact being reiterated at the Transportation Conference held in New York last week. This reality was obvious after trucking players like Con-Way (CNW), Old Dominion Freight Line (ODFL) and Knight Transportation (KNX) slashed their EPS guidance for the second half. However, it was also observed that the intermodal mode of transportation was the key growth driver. In fact, J.B. Hunt Transport Services, Inc. (JBHT) is a classical example of a trucker that is increasingly focusing on this mode of transportation, and is therefore expected to grow in future.
JB Hunt Transportation Services
The largest trucker by market cap, JBHT recorded profits in line with Wall Street estimates, but missed slightly on revenues, in its last earnings release.
Earnings and revenues were up 26% YoY and 9% YoY, respectively. The growths in earnings and revenues were not in line with the growth of the economy – again showing that it is not always true that trucker stocks and the economy may be moving in the same direction – primarily due to demand, capacity and regulatory issues.
The company operates in four complementary divisions, namely Intermodal (JBI), Dedicated Contract Services (DCS), Truckload (JBT) and Integrated Capacity Solutions (ICS). JBI and JBT are self-explanatory. DCS involves renting of customized equipment fleets to customers, while ICS primarily involves freight brokerage of full truckload and less-than-truckload (LTL) carriers.
The following chart shows the revenue mix from the four divisions:
JBI is the highest revenue generating division of the company, and this shows how strong a rail network the company has managed to establish over time.
This shows the importance of the ICS division, and this is where the success of the LTL mode of trucking transport is highlighted. LTL has emerged as an efficient mode of transport, as it optimizes truck floor space so that even small businesses can afford to use this means of transport. The recent success of this mode is largely attributed to the slowdown in the economy, as businesses avoid ordering in bulk.
The performance of the company’s various divisions was as follows:
JBIT’s revenues increased due to the rise in truckload. The rise in operating income was also because of a more stable demand and lesser personnel costs. However, it was offset by purchase transportation cost, drivers’ wages and maintenance costs. In future, fuel costs are expected to rise, depleting the operating income.
The main drivers for the future include the average length of haul, which is on a decline, and revenue per load, which is on a rise. Importantly, the intermodal fleet expansion this quarter will bring increased revenues, but the improvement in intermodal pricing is expected to be only 2%-4%, as large intermodal players will serve up tough competition in the future. The company has a huge opportunity to grow in its eastern network, where the infrastructure is supportive of truck-rail conversion, and four new intermodal facilities are expected to open this year.
DCS’ results show a slight growth in revenues, but the income growth was immense, most of which is attributed to a decline in fuel costs. However, operating income was affected by higher safety costs, higher toll road charges, and increased maintenance costs. Average length of haul and total loads are expected to remain flat for the year. Still, due to the unique nature of this segment, the sell side assumes that it is a competitive moat for the company, and expects secular growth in the future due to less competition in the market.
JBT’s results show YoY decline, which was inevitable, given the weak condition of the economy. Operating income rise is again due to the decline in fuel costs. However, for the future, the growth in operating income is likely to decline, given the rising fuel prices. The shortage of drivers will also lead to a rise in truck drivers’ incentives, and hence operating expenses. Another important driver is the average non-paid empty mile per load, which is on the rise. Utilization rates are also on a decline. The sell side expects prices to rise by only 2%-4% in 2012.
ICS has shown negative growth in operating income due to a lack of demand from shippers, and limited capacity growth. However, an impact was felt by many other brokers like CH Robinson Worldwide (CHRW). In the future, margins for this segment will deteriorate by 60bps.
Valuations
With expected annual growth of 18% for the next five years, and forward P/E of 17x, the stock is trading at the high end of transportation valuations. The DCS and intermodal segments are likely to give a growth pattern, although JBT and ICS will show soft growth. The stock has a repute of paying consistent dividends. The company has a forward dividend yield of 1.1%. The following shows the company’s strong dividend history.
The ROE of 45% is higher than that of the industry. Of the last 20 insider transactions, 14 have been sells, giving a bearish outlook on the stock. However, the last transaction was recorded on August 14, when the stock was trading at $55.60. Also, most of the negative news has already been incorporated in the stock. JBHT seems a story of margin expansion and growth, as the economy recovers from stunted growth.
