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A Trucking Stock With the Pedal to the Metal

The transport sector has long been seen as a barometer for the broader economy. A good way to gauge its health is through the Dow Jones Transportation Average (DJTA).

Compiled in 1884 by Charles Dow, co-founder of Dow Jones & Company, the DJTA, a price-weighted average of 20 U.S. transportation stocks, is the oldest stock index in the country.

When it was first set up, nine of its holdings were railways, but it has diversified along with the sector it represents and now includes a range of firms, from couriers like FedEx (NYSE: FDX) to marine shippers and trucking companies like J.B. Hunt Transport Services (NasdaqGS: JBHT).

The index has put on a strong run so far this year, rising 34% since January 1. That’s well ahead of a 21% gain for the wider Dow Jones Industrial Average and 25% for the S&P 500. The coming years also look promising for the transport sector, particularly from the cabs of the nation’s tractor-trailer fleet.

Trucking Industry Shifts Gears

According to the 2013 U.S. Freight Transportation Forecast, compiled by the American Trucking Association, the trucking business is in for a period of significant long-term growth.

The forecast, which was released in June, estimates that overall freight revenue in the U.S. will reach $1.3 trillion annually in 2024, up 63.6% from 2012. Trucking will see its share of that revenue rise to 81% in 2024 from 80.7% last year.

Meanwhile, the U.S. Department of Transportation predicts that trucks will carry 36.6% of the country’s freight by 2020, up from 33% in 2001. That’s the biggest gain during this period among all freight-transportation options.

King of the Road

These trends bode well for both the wider economy and firms like J.B. Hunt, the country’s largest truckload carrier by revenue.

J.B. Hunt was incorporated in Arkansas in 1961, when it operated just five trucks and seven refrigerated trailers. It began trading publicly in 1983, by which time it had grown to 550 trucks and 1,049 trailers. Today, its fleet boasts over 47,000 trailers and 12,000 trucks.

Investing Daily analyst Benjamin Shepherd issued a buy call on the stock in a July 22, 2009, article in our Personal Finance newsletter, during the darkest days of the recession. He liked J.B. Hunt’s broad array of services, particularly its growing expertise in intermodal shipping, which helped soften the blow from the downturn and put the company in a great position to benefit as the economy regained its footing.

“J.B. Hunt was one of the first trucking outfits to enter intermodal shipping, establishing major relationships with Burlington Northern Santa Fe in the west and Norfolk Southern (NYSE: NSC) in the east,” wrote Shepherd.

“These relationships are by no means exclusive, and there’s plenty of competition,” he added. “But J.B. Hunt’s tenure and expertise in intermodal shipping makes it one of the lowest-cost shippers in the market, a distinct competitive advantage.”

It turned out to be a prescient call: since Shepherd’s article was published, J.B. Hunt shares have gained 181%, well ahead of the S&P 500’s 87% gain.

Benefiting From Online Shopping

Today, J.B. Hunt’s business continues to be well diversified, though its intermodal segment has grown to account for a somewhat larger share of its overall revenue: 61% in 2012 compared to 55% in 2009.

J.B. Hunt’s other segments include Dedicated Contract Services (DCS), which provides specialized delivery services, including drivers and equipment, typically under long-term contracts (21% of 2012 revenue); Integrated Capacity Solutions, which manages shipping using both outside carriers and company-owned equipment (9%) and its truckload service (JBT), which ships freight using company-owned trucks (9%).

E-commerce is another growth area for the company: its Final Mile service specializes in delivering online orders from its warehouses to customers’ homes. J.B. Hunt specializes in delivering heavier items, like treadmills, dishwashers and furniture.

“FedEx does a great job delivering small packages to the front door,” said DCS president Nick Hobbs earlier this year, “but I didn’t see any major carrier taking large, bulky items into the home and assembling or installing them for the manufacturer or retailer. So we started doing it.”

In the third quarter, J.B. Hunt’s overall revenue rose 10.8% from a year ago, to $1.44 billion. Earnings per share rose 15.4%, to $0.75 from $0.65. Revenue matched the Street’s forecast, though earnings fell just short of the $0.78 a share that analysts were expecting.

The company continued to see strength at the intermodal business, where revenue gained 12% and operating income rose 21%. DCS revenue and earnings also rose 17% and 14%, respectively, thanks to new accounts. ICS revenue gained 13% on higher volume and revenue per load, though earnings fell 48% due to higher costs, including for personnel.

The trucking division’s revenue and earnings fell 17% and 84%, as more shippers shift to intermodal service. This business is also dealing with higher staffing costs, including for attracting and retaining drivers.

Costs, Competition Add Uncertainty

In addition to the rising cost of labor, the company must also deal with fluctuating fuel prices. At the same time, the trucking business remains both heavily impacted by swings in the economy and hotly competitive. The key is to build strong relationships with customers, a major focus for J.B. Hunt.

The company is also doing a good job of keeping a lid on its costs: its operating margin widened slightly in the latest quarter, to 10.5% from 10.3% a year ago.

J.B. Hunt is also lowering its debt, ending the latest quarter with long-term debt of $437.5 million, down from $585.3 million on December 31, 2012. As well, it has raised its capital spending by 20% through the first nine months of 2013, which helps it keep its equipment at the leading edge of the industry.

The average analyst estimate calls for earnings of $2.89 a share for all of 2013, up from $2.59 a year ago. That could rise to $3.39 a share in 2014, and the stock trades at 22.2 times that forecast, which is higher than competitors like Swift Transportation (NYSE: SWFT) at 15.6 and Landstar System (NasdaqGS: LSTR) at 19.4.

However, the company’s specialized services, growth in new markets (such as e-commerce) and modern equipment should keep it at ahead of the pack as the U.S. economy continues to rev up.

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