We are maintaining our long-term ‘Neutral’ recommendation on J.B. Hunt Transport Services Inc. (JBHT) with a Zacks #3 Rank (‘Hold’).
We believe J.B. Hunt’s continued strength in freight demand, strong balance sheet, improved rail service and network capabilities, continuous dividend disbursement and improving truckload fundamentals bode well for the company.
Additionally, the company continues to gain market share from its Intermodal and Dedicated Contract Services (DCS) businesses. However, competitive threats and inability to pass higher prices on to customers or attract and retain drivers are the major risks, which would likely limit the potential upside for the stock.
In the recently-concluded fourth quarter of 2010, J.B. Hunt’s reported earnings of 46 cents per share missed the Zacks Consensus Estimate by a penny. However, it improved from 32 cents in the year-ago quarter on growing demand for transportation services.
In 2010, the company’s balance sheet projected a total debt of $654.0 million versus $565.0 million in 2009 and cash and cash equivalents of $7.7 million against $7.8 in 2009. J.B. Hunt‘s capital expenditure was $226 million against $249 million in 2009.
The company is continuously investing in equipment such as tractors, trailers, containers and trucks in order to gain market share and produce higher returns on invested capital. It plans to spend approximately $406 million in 2011 for investments in equipment. Additionally, it is also focusing on reducing cost by increasing the efficiency of equipment.
The company focuses on its commitment to shareholders through share repurchases and dividend payments. It has recently hiked its quarterly dividend to 13 cents per share from 12 cents citing business growth across its network. We expect the company to continue with its share repurchase program in 2011 given that $249 million remains unutilzed under the share repurchase authorization.
We believe J.B. Hunt will benefit from its largest segments, Intermodal and DCS Demand for intermodal services is expected to grow given road freight conversion opportunities. Additionally, the company will benefit from higher pricing as railroad, driver and equipment cost increases will be passed on to customers on maturity of contracts.
We expect the DCS segment to remain on its growth trajectory as delivery channels (delivering product to its point of consumption) and the replenishment channel (delivering product to point of sale) will gain new contracts compared to the capacity channel, which is based on truck load.
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 due to empty or out-of-route miles that cannot be billed to customers.
The truck industry is highly exposed to self-insured liability insurance. 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 Worldwide Inc. (YRCW) and Con-way Inc. (CNW).
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