J.B. Hunt Transport To Outperform In 2016

| About: J.B. Hunt (JBHT)

Summary

Secular growth opportunities in JBHT's intermodal business.

Benefit from intermodal volume growth created by a recovery on the BNSF, incremental carloads on the BNSF's Northern Corridor cross-border Canada conversions and cross-border Mexico market development.

Risk-reward favourable as JB Hunt's stock price trading at attractive valuations.

JB Hunt Transport Services (JBHT)

Fundamentals

J.B. Hunt Transport Services ranks among the top surface transportation firms in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement (60% of sales in 2014), dedicated contract services which provide customer-specific fleet needs (22%), full truckload (6%) and highway brokerage (12%).

Competitive advantage

Intermodal enjoys favorable secular tailwinds, particularly market share gains from long-haul trucking (solid truckload-to-intermodal conversion activity). Hunt's truckload and dedicated-contract operations are well positioned to enjoy decent pricing power in the years ahead thanks to limited industry capacity. The firm's highway brokerage operations are benefiting from constrained truckload supply which drives up transactional and spot opportunities. Hunt's intermodal operations have enabled the firm to carve out a narrow economic moat via the network effect and scale economies. It would be extremely difficult to replicate the company's large container fleet and vast drayage network. Strong partnerships with Burlington Northern Santa Fe (BNSF) and Norfolk Southern (NYSE:NSC) also contribute to its competitive strength.

Financials

FYE - Dec 31st

FY10

FY11

FY12

FY13

FY14

In US$ mn

Revenue

3,793.5

4,526.8

5,054.9

5,584.6

6,165.4

Revenue growth (%)

18.4

19.3

11.7

10.5

10.4

Gross Profit

675.1

778.1

887.3

982.2

1,117.3

Gross Profit Margin (%)

17.8

17.2

17.6

17.6

18.1

Operating Profit

347.6

444.2

530.2

576.7

631.5

Operating Profit Margin (%)

9.2

9.8

10.5

10.3

10.2

Net Profit

199.6

257.0

310.4

342.4

374.8

Net Profit Margin (%)

5.3

5.7

6.1

6.1

6.1

EPS (GAAP)

1.56

2.11

2.59

2.87

3.16

Dividends per Share

0.48

0.52

0.71

0.45

0.80

Capital Expenditures

262.5

502.3

439.5

493.4

808.6

Free Cash Flow

105.7

71.2

25.1

28.1

(255.4)

Cash & ST Investments

7.7

5.5

5.6

5.8

5.9

Total Assets

1,961.7

2,267.3

2,464.6

2,819.4

3,397.1

Total Debt

654.2

749.2

685.4

708.4

933.5

Total Equity

573.0

567.5

791.9

1,012.4

1,204.5

ROA

10.5

12.2

13.1

12.9

12.1

ROE

32.8

45.1

45.7

37.9

33.8

# of Employees

15,223

15,631

16,475

18,467

20,158

Click to enlarge

Risks

  • Continued drop in fuel prices could put 8% to 10% volume growth range at risk in 2016
  • Economic backdrop could deteriorate further and core truckload pricing could deteriorate in 2016 dragging intermodal pricing with it
  • Leg down in the forward on-highway diesel curve and excess supply in the truckload market raising concerns on new conversions

Outlook

Improving FCF and Returns - After bringing down capital spending in 2015, JBHT is continuing the momentum on capex reductions after hitting peak investment levels in 2014. The company is currently projecting net capex to decline to $537 mn in 2016. This would free up $33 mn in cash compared with last year and thereby helping drive free cash flow conversion to multiyear highs.

Cost improvements to provide additional support to EBIT growth and ROIC - Cost improvements from the investments that the company made in 1H15 should yield benefits. In 2Q15 JBHT took a $14.1 mn one-time charge for corporate wide streamlining and technology redevelopment costs, the benefits of which will start to materialize in 2016 and 2017 and this is expected to improve its ROIC (Return on invested capital).

Investment Rationale & Conclusion

In an environment where freight volume growth is likely to be a scarcity during 2016, JBHT is one of the few companies expected to outperform. However, given Hunt's market leading position in the $15 bn intermodal sector (with 1.7 million units shipped annually), investors are having trouble reconciling the company's intermodal load growth guidance of 8-10% in 2016 with the recent downdraft in the diesel forward curve resulting in its stock currently trading near its 52 week low.

JBHT is currently trading below its historical average forward P/E and that market-implied return expectations are at multi-year lows and hence it is an opportune time to own a well-managed company with numerous avenues for secular volume growth.

JBHT currently trades at $65.27 (closing price as on 20th Jan, P/E ttm 18.35) with its 52-week range of $63.58 - $93.5 and looks attractive for potential upside from current levels over medium-term as outlined below:

  • A recovery in Trans-continental loads via improved and expanded service on the BN, as well as a shift back of int'l containers to the West Coast ports
  • The Eastern growth opportunity on top of growth resulting from improved network fluidity at NSC and former Triple Crown Service shutting off and hence there is scope for additional expansion on the CSX
  • Its partnership with Canadian National to capture cross-border U.S./Canada and incremental domestic U.S. highway conversions in the Midwest
  • Tapping into the cross-border Mexico intermodal market over the longer term by forging an alliance with Kansas City Southern

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: (Sources: Company Investor presentations, Press Release, Annual Report, SEC Filings -Form 10-K, 10-Q, Morningstar, Reuters, Moody's, Nasdaq, gurufocus, globaltrademag,Yahoo Finance)