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J.B. Hunt Looking A Little Stretched
One of the trickiest parts of investing is figuring out that fine line between opportunism and greed. Take the case of J.B. Hunt (Nasdaq:JBHT). This transportation company is seeing excellent growth in its intermodal business, and intermodal transport is likely to be a strong multi-year growth story. On the other hand, expectations are already pretty steep and competition is sure to ramp up. That makes this a tricky hold, as results are likely to stay strong for a while, but today's valuation makes long-term underperformance more likely.
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A Strong Start to the Year
J.B. Hunt definitely offered up a solid start to this year. Total revenue rose 17%, fueled by a 20% rise in the intermodal business. Truck revenue and dedicated service revenue were up much more modestly (8 and 7%, respectively), while the smaller Integrated Capacity Solutions business saw strong 30% growth but remains a relatively small operation.
Profitability was strong as well. Operating income rose nearly 30%, while EBITDA climbed about 22%. Margins were strong everywhere but in truckload, where operating income fell 16%.
SEE: Understanding The Income Statement
Intermodal Still Growing, but Not a Perfect Story
Intermodal continues to drive growth at J.B.Hunt. Railroad partners Berkshire Hathaway (NYSE:BRK-A), which owns BNSF, and Norfolk Southern (NYSE:NSC) helped fuel 16% overall volume growth. Growth was unbalanced, though, as eastern volumes rose 28% and western volumes rose just 9%. Revenue per load (pricing) wasn't bad - rising a little bit less than 4%, but coming in shy of many sell side estimates.
Remember that J.B. Hunt owns the largest 53-foot intermodal container fleet; growing that by 14% this quarter to nearly 55,000. Nevertheless, investors should expect competition to pick up - whether from the likes of Hub Group (Nasdaq:HUBG) and Pacer (Nasdaq:PACR), or new entrants. There could also be more wrangling in the future over how the pricing pie is cut up - railroads are looking to intermodal as a major growth driver in the future.
Trucking Is What It Is
J.B. Hunt's trucking operations continue to be a mixed bag. The dedicated contract business is still doing pretty well and this is probably more and more of the company's future in trucking.
The truckload business is another story. There was fine weather in the first quarter, but fuel prices took a bigger bite and spot rates were pretty soft. As has been the case for some time, J.B. Hunt is really not a traditional trucking story anymore and investors who want to invest in trucking would do better to look at names like Old Dominion (Nasdaq:ODFL) or Arkansas Best (Nasdaq:ABFS).
The Bottom Line
With J.B. Hunt's strong run since the fall of 2011 and the general enthusiasm on the Street for intermodal, these shares are not cheap. Granted, the company's EBITDA growth is quite good in relation to its EBITDA multiple, but it's tough to make this stock work from a cash flow perspective.
This is a hard stock to recommend for buying or selling. To buy, you have to be willing to project growth rates that look truly eye-popping. On the other hand, it looks as though the future really is about seeing more trucking cargo switched over to intermodal and the market share of intermodal could well double in less than a decade. I'd be hesitant to sell out of a winner with a good story behind it, but investors should be aware of the high expectations already in the stock.
SEE: A Clear Look At EBITDA
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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A Strong Start to the Year
J.B. Hunt definitely offered up a solid start to this year. Total revenue rose 17%, fueled by a 20% rise in the intermodal business. Truck revenue and dedicated service revenue were up much more modestly (8 and 7%, respectively), while the smaller Integrated Capacity Solutions business saw strong 30% growth but remains a relatively small operation.
Profitability was strong as well. Operating income rose nearly 30%, while EBITDA climbed about 22%. Margins were strong everywhere but in truckload, where operating income fell 16%.
SEE: Understanding The Income Statement
Intermodal Still Growing, but Not a Perfect Story
Intermodal continues to drive growth at J.B.Hunt. Railroad partners Berkshire Hathaway (NYSE:BRK-A), which owns BNSF, and Norfolk Southern (NYSE:NSC) helped fuel 16% overall volume growth. Growth was unbalanced, though, as eastern volumes rose 28% and western volumes rose just 9%. Revenue per load (pricing) wasn't bad - rising a little bit less than 4%, but coming in shy of many sell side estimates.
Remember that J.B. Hunt owns the largest 53-foot intermodal container fleet; growing that by 14% this quarter to nearly 55,000. Nevertheless, investors should expect competition to pick up - whether from the likes of Hub Group (Nasdaq:HUBG) and Pacer (Nasdaq:PACR), or new entrants. There could also be more wrangling in the future over how the pricing pie is cut up - railroads are looking to intermodal as a major growth driver in the future.
Trucking Is What It Is
J.B. Hunt's trucking operations continue to be a mixed bag. The dedicated contract business is still doing pretty well and this is probably more and more of the company's future in trucking.
The truckload business is another story. There was fine weather in the first quarter, but fuel prices took a bigger bite and spot rates were pretty soft. As has been the case for some time, J.B. Hunt is really not a traditional trucking story anymore and investors who want to invest in trucking would do better to look at names like Old Dominion (Nasdaq:ODFL) or Arkansas Best (Nasdaq:ABFS).
The Bottom Line
With J.B. Hunt's strong run since the fall of 2011 and the general enthusiasm on the Street for intermodal, these shares are not cheap. Granted, the company's EBITDA growth is quite good in relation to its EBITDA multiple, but it's tough to make this stock work from a cash flow perspective.
This is a hard stock to recommend for buying or selling. To buy, you have to be willing to project growth rates that look truly eye-popping. On the other hand, it looks as though the future really is about seeing more trucking cargo switched over to intermodal and the market share of intermodal could well double in less than a decade. I'd be hesitant to sell out of a winner with a good story behind it, but investors should be aware of the high expectations already in the stock.
SEE: A Clear Look At EBITDA
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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