The markets remind us over and over again that quality stocks often appreciate well beyond fair value, particularly when they become popular picks in attractive sectors. That would seem to be the case at J.B. Hunt (Nasdaq:JBHT), as it is quite difficult to call the stock's price a bargain by conventional means. While the Street's love for J.B. Hunt has been great for shareholders, it does come with a price, as expectations seem to be quite high for this well-run transportation company.

Q1 Results Good, But Are They Good Enough?

In a vacuum, I think it would be hard to complain about J.B. Hunt's results in the first quarter. Unfortunately, stocks aren't analyzed or traded in a vacuum, and I think the stock could show some weakness as the company came in a little shy of expectations.

Revenue rose 11% this quarter, and was basically in line with sell-side expectations. The intermodal business saw 15% growth (on 13.5% volume growth), while ICS (truck brokerage) grew 26%. The dedicated contract services business (DCS) saw 9% in growth of operating revenue on a better-than-13% volume increase, while truckload shipping revenue declined 21% on a 16% decline in loads.

Price competition and rising costs continue to be very relevant themes in the intermodal and truck transport markets, and J.B. Hunt did disappoint on margins. Operating income rose 7%, leading to a slight (30bp) decline in operating margin. Margins were quite good in intermodal, with 22% operating income growth and a first-ever sub-88 operating ratio. While truck brokerage income rose 27%, there was more margin pressure here than expected. Both truckload and DCS saw weak margins and lower operating income (with a 78% drop in truckload).

JBHT's Intermodal Business Still A Great House In A Great Neighborhood

Intermodal continues to be a great business, both for railroads like Norfolk Southern (NYSE:NSC) and Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern, and for intermodal players like JBHT and Hub Group (Nasdaq:HUBG). With significant cost benefits to customers, investors have every reason to expect ongoing conversion from trucks to intermodal in the coming years. But this isn't just about market growth for J.B. Hunt – the company also looks like a share gainer, as load growth of 13.5% was well ahead of the 9% year-to-date volume growth in the intermodal sector.

Brokerage Is A Tough Business, With Ample Competition

I'm a little less sanguine about J.B. Hunt's truck brokerage business, but not because of any particular company-specific problems. Rather, it's just that this is a very competitive business. Revenue was up 26% this quarter, but volumes were up 47% - giving investors some idea of the price competition. This likely means that companies like CH Robinson (Nasdaq:CHRW) and Landstar (Nasdaq:LSTR) also saw some margin pressure this time around.

Speaking of competition, investors would do well to keep an eye on XPO Logistics (NYSE:XPO) in this space. While a small player today, this company has extremely ambitious growth goals – looking to become the #2 player in about three years. That could make life for larger companies like J.B. Hunt a little more interesting in the coming years.

Truckload And DCS Are “Known Unknowns”

I'm not nearly so concerned about these other two businesses at J.B. Hunt. Yes, the truckload business was disappointing and margins were weak. Perhaps that's bad news for Knight (NYSE:KNX) or Werner (Nasdaq:WERN), but seeing as how this business is effectively in a state of “managed decline”, I would expect a certain degree of margin deleverage.

On the DCS side, volume growth was strong as the company takes on new business, but pricing was a little soft. Operating income was disappointing (down 22%), and not all of that can be tied to new contract costs, but I think ongoing scale improvements will lead to better results down the line.

The Bottom Line

I know there are investors who will resent my quibbling about J.B. Hunt's valuation and believe that the quality of the company and the opportunity mean that you should just ignore valuation and buy the stock anyway, trusting that growth will make it all work out in the end. Maybe that has been true recently (as I said, quality stocks can certainly perform better than anybody expects), but I happen to believe that valuation always matters.

To that end, I just think J.B. Hunt is too expensive today. Even if the ongoing evolution of the company leads to sustained high single-digit long-term revenue growth and much better free cash flow generation, this is still an industry with thin cash flow streams. Accordingly, while I'd still love to pick up shares on a significant pullback, I'm not expecting to get that chance anytime soon.

Related Articles
  1. Investing

    Zooming In On Net Operating Income

    NOI is a long-run profitability measure that smart investors can count on.
  2. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  3. Markets

    Free Cash Flow: Free, But Not Always Easy

    Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery.
  4. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  5. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  6. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  7. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  8. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  9. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  10. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!