We are initiating coverage on J.B. Hunt (JBHT) with a Neutral rating. Currently, the stock has a Zacks #3 Rank (Hold).
Our positive outlook on J.B. Hunt is based on continued strength in freight demand, strong balance sheet, improved rail service and network capabilities, continuous dividend disbursement as well as improving truckload fundamentals. J.B. Hunt will try to recover pricing that was lost over the last two years and its profitability is expected to increase in the near term. However, we are concerned that shippers might find it difficult to secure adequate capacity due to supply and demand imbalance.
The trucking industry is emerging from multi-year freight recession. Second quarter 2010 earnings were ahead of the Zacks Consensus Estimate and the year-ago level, led by improved demand for transportation services. Total revenue increased from higher volumes in the Intermodal segment and significant growth in the Dedicated Contract Services and Truck segments.
J.B. Hunt’s business operations are primarily organized through four distinct business segments. These segments include Intermodal (JBI), Dedicated Contract Services (DCS), Full-Load Dry Van (JBT) and Integrated Capacity Solutions (ICS).
We believe J.B. Hunt continues to gain market share from its Intermodal and DCS businesses. The Intermodal segment continues to penetrate new markets and gain market share in the east, thereby providing competitive advantage for the company as it profits from longer-haul shipments and short-haul contracts. The DCS segment is evolving into a highly specialized fleet with greater focus on final mile (i.e., residential) delivery. The segment is expected to drive double-digit revenue growth in long term.
Further, ICS will continue to show rapid growth, and JBT is expected to deliver significant leverage as pricing rebounds in the industry. Intermodal pricing is expected to increase owing to a tight capacity environment.
J.B. Hunt is committed to shareholders through continuous dividend payments and share repurchases. The company has increased its dividend every year and paid quarterly dividends of 9 cents, 10 cents and 11 cents per share in 2007, 2008 and 2009, respectively. Currently, the company is paying 12 cents per share, equating to 48 cents on an annual basis. This represents a dividend yield of 1.36%.
However, volatility in fuel prices is the major risk to the stock. J.B. Hunt adopted a fuel surcharge revenue program that enables it to recover the majority of higher fuel costs from customers. But there can be timing differences between a change in the fuel cost and fuel surcharges billed to customers. The company also incurs additional costs when fuel price increases cannot be fully recovered.
J.B. Hunt’s success is also dependent upon its ability to retain and attract drivers. If the company is unable to maintain the necessary number of employees or contracts with enough independent contractors, it may significantly increase employee compensation packages, which may in turn increase the cost for the company.
J.B. Hunt competes with a range of regional and national transportation and logistics companies. The trucking industry in highly fragmented as low barriers to entry exist. The company competes directly with other truckload carriers such as YRC Worldwide Inc. (YRCW), Old Dominion Freight Line (ODFL), and Conway Inc. (CNW). It also competes indirectly with railroad and air freight.
We remain on the sidelines due to competitive threats, and believe inability to pass higher prices to customers or attract and retain drivers are serious risks to the company that can limit the upside potential of the stock.
J.B. Hunt Transport Services Inc. is a publicly held holding company that, together with the wholly owned subsidiaries, provides a wide range of transportation services to a diverse group of customers throughout the continental United States, Canada and Mexico. It is one of the largest surface transportation and delivery service companies in North America. The company has arrangements with most of the major North American rail carriers to transport freight in containers and trailers.