J.B. Hunt: A La Intermodal

By Stephen D. Simpson, CFA | July 20, 2011 AAA

Despite concerns about economic activity, railroad volume, shipping container volume and the health of the trucking industry, goods are still getting shipped around the country and more and more of that shipping is being handled by intermodal carriers. That puts J.B. Hunt (Nasdaq:JBHT) in the driver's seat, and the company is certainly delivering strong results.

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Good Second Quarter Results, With a Catch
In many respects J.B. Hunt had a great quarter. Operating revenue was up nearly 22% and, even excluding fuel surcharges, leaves 14% revenue growth. The company's intermodal business was the leader; growing 29% this quarter and making up nearly 60% of operating revenue. The company's dedicated contract services business also did well, with growth of 15%. Trucking was the laggard, coming in with just 4% revenue growth this period.

Where J.B. Hunt did not impress so much was on profitability. Operating income did grow 24% (and operating margins did expand by about 20 basis points), but expectations were higher. Although J.B. Hunt saw lower wage and benefits costs, and shaved off costs in some small line-items, higher purchased transportation costs took some of the wind out of the sales. Purchased transportation is basically what it sounds like - the fees that J.B. Hunt pays to truckers, railroads and the like to carry cargo for them.

Intermodal Still the Story
Intermodal transportation is clearly the story driving J.B. Hunt these days. More and more cargo is getting carried this way, and the company saw an 18% increase in loads this quarter, with load growth in its eastern market of 32%. This is also a partnership business; Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern accounts for about 60% of J.B. Hunt's intermodal volume, with Norfolk Southern (NYSE:NSC) accounting for a sizable part of the remainder. This is both a good news and bad news situation - these are large and reliable partners, but the reality that there are substantially fewer rail operators than intermodal providers does tilt the market.

What About the Rest of the Sector?
There has been anecdotal evidence that sluggish economic performance is leading retailers to trim back or delay orders, and manufacturers are likewise holding off on supplies and components. That could prove to be risky if consumer demand picks up going into the Christmas shopping season. Since it takes a while to arrange and fulfill seaborne cargo, that could present some upside to air freight carriers like UPS (NYSE:UPS), FedEx (NYSE:FDX) and Atlas Air (Nasdaq:AAWW) if retailers have to scramble to get product on the shelves.

Elsewhere, it is still a challenging market. Demand for containers has been strong for companies like SeaCube (NYSE:BOX), but some of that may be due not so much to robust freight volume as slower trips (which cuts fuel costs but ties up more containers). Likewise, some truckers like Arkansas Best (Nasdaq:ABFS) and Old Dominion (Nasdaq:ODFL) are seeing decent volumes, but national truckload carriers like Swift (Nasdaq:SWFT) are seeing more challenging environments.

The Bottom Line
Margin issues notwithstanding, J.B. Hunt is doing a good job of exploiting this growing interest and demand for intermodal transportation. Given that intermodal actually gets more attractive with higher fuel prices, this could be a name to watch for ongoing earnings momentum. At the same time, it is not a terribly cheap stock, so value investors may want to bide their time and wait for a cheaper fare. (For additional reading, see The Value Investors Handbook.)

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