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JBHT AT A GLANCE

P/E ► 25.8 AVG EV/EBITDA ► 11.0 AVG ROA ► 9.4% HIGH ROE ► 27.2% HIGH Debt to Equity ► 2.06 AVG Current Ratio ► 1.50 AVG Interest Coverage Ratio ► 10.7 AVG

 

 

 

 

 

 

J.B. Hunt Transport Services (JBHT: NASDAQ) is one of the top 10 freight shippers in North America, generating more than $3 billion in revenues each year. The company ships forest and paper products, building materials, general merchandise, food and beverage, chemicals, and automotive parts.^[1]

J.B. Hunt's top 10 customers accounted for 40% of 2006 revenue (Wal-Mart alone was 14%), so customer concentration risks exist for J.B. Hunt, and the loss of one major customer would have a significant impact on the firm's balance sheet. Company profits are also closely linked to the the health of the economy, because when consumer spending is down companies ship less goods and companies like J.B. Hunt have to lower their rates to attract business.

J.B. Hunt relies on third-parties, such as Burlington Northern Santa Fe (BNI) and Norfolk Souther (NSC), for its intermodal operations (when goods are shipped by a combination of rail and truck transport). Intermodal shipping uses fewer workers and less fuel, so its a cheaper option for most companies (but limited to places where there are existing train routes). This could help J.B. Hunt outperform competitors who are focused exclusively on trucking in a protracted recession, because when companies cut shipping costs to respond to lower demand they will first cut more expensive truckload shipping rather than more efficient intermodal operations.^[2]

Business Overview

J.B. Hunt charges customers to transport goods across North America for them. Through the end of 2006, J.B. Hunt used three operating segments to distinguish the different shipping methods offered to its customers. In 2007, J.B. Hunt added a fourth segment, Integrated Capacity Solutions (ICS), to the mix. Shipping rates include base rates plus a fuel surcharge. The fuel surcharge can temporarily boost or decrease revenue, and may not always be able to transferred to the customer.^[4]

Operating Segments

• Intermodal (JBI): Using 27,622 containers and 1,551 company-owned tractors, the Intermodal division works with customers to provide transportation using more than one transportation mode. J.B. Hunt teams with third-party transporters, such as railroad companies, to ship goods. J.B. Hunt will usually pick goods up from the customer and take them to a train station. The goods are then transported by the third-party to the destination station. J.B. Hunt will subsequently deliver these goods from that station to where the customer needs the goods^[5].

• Dedicated Contract Services (DCS): This operating segment provides customers access to specific shipping needs. J.B. Hunt will give exclusive of its equipment and drivers for a specific shipper. Forming approximately 28% of 2006 revenue, J.B. Hunt dedicated 5,177 tractors to this segment in 2006. Due to the nature of customized freight movement, DCS tries to establish long-term working contracts with customers. Currently, the operating segment has a major contract with Wal-Mart Stores (WMT)^[6].

• Full-Load Freight (JBT): JBT provides truckload services to shipping customers. J.B. Hunt uses 4,232 tractors in order to route goods directly from origin to destination without any intermediate handling. The truckload business accounted for $1.01 billion in 2006, which was slightly down from $1.02 billion in 2005.^[7].

• Integrated Capacity Solutions (ICS): Generating a small portion of 2007 revenue, this newly formed operating segment provides comprehensive transportation services by utilizing a number of third-party transportation companies^[8].

This table compares each division's contribution to total revenue in the first nine months 2007 versus the same length period in 2006.

Comparing Operating Revenues for the First Nine Months of 2007 vs. 2006^[9]

Comparing Operating Income for the First Nine Months of 2007 vs. 2006^[10]

Negative trends in the trucking segment relative to intermodal can be attributed to weakness in overall shipping tonage, which is down 1.7% in 2007.^[11] JBT loads hauled were down 11.1% in the the 3Q of FY 2007 compared to the same period in '06. JBI, the intermodal segment of J.B. Hunt, has benefited from increase in customer's choosing alternative modes of transportation outside of highway shipping. Load volume for the segment jumped 23% in the 3rd Quarter of 2007 compared to the 3rd Quarter of 2006^[12].

Financial Overview

^[13]. Overall, revenues and income trended higher over the past five years. The U.S. Economy was healthy, and as a result, demand for trucking remained strong. Comparing 2006 with 2005, overall revenue increased 6.4%; however, excluding the Fuel Surcharges, revenue rose 4.3%. A 5.1% in the JBI operating segment and a 2.2% rise in DCS offset the decline in the JBT segment^[14].

Operating Metrics

A Look at J.B. Hunt's Business Metrics^[15].

Ownership Interest in Transplace

With a 37% ownership interest, J.B. Hunt co-owns the logistics company, Transplace, along with 4 other large transportation companies. Transplace (TPI) provides management and freight movement services to customers. TPI uses approximately 2,700 motor carriers to help with freight movement^[16]. J.B. Hunt uses the equity-method of accounting for its ownership in Transplace. Transplace accounted for roughly $3.1 million in income before taxes in 2006^[17].

Key Trends and Forces

• Sensitivity to Economic Conditions: The trucking industry is closely tied to U.S. economic cycles and is particularly vulnerable to fluctuations in the manufacturing and retail sectors. This correlation between economic growth and trucking profits is due to basic supply and demand economics, since customers typically use a bidding system, which tends to keep prices fairly competitive; when shipping volume decreases in a weakening economy with supply held constant, then prices usually decrease. The blue line in the 'TSI Image' shows the Transportation Service Index. The Index measures the movement of freight. As one can see, during weaker GDP periods (early 90's, 1995, and 2000-01), total freight shipments were down to flat.

• Government Regulations: J.B. Hunt must follow regulations set forth by the US Department of Transportation and Homeland Security, along with the Environmental Protection Agency (EPA). The EPA requires a progressive decrease in diesel truck emissions through 2010 due to environmental concerns. These regulations could lead to higher fuel, trucks, and maintenance expenses. J.B. Hunt expects the new 2007 models that meet EPA standards will result in roughly 4 to 5 cents more per gallon as a result of having to use more costly ultra-low-sulfur diesel.^[19] Hours-on-service (HOS) laws govern interstate trucking and regulate the number of hours a truck driver can work. In 2005, the U.S. Federal Motor Carrier Safety Administration said a worker cannot drive more than 11 hours after being off-duty for 10 hours. Also, a commercial motor vehicle (CMV) driver cannot exceed 60/70 hours in a 7/8 day period.^[20]

• Driver Retention Risks: Competition to obtain and retain truck drivers is high in the industry. J.B. Hunt experienced increases in labor costs in 2005 and 2006 in order to try to keep drivers on board. This expense rose 4.3% between 2005 and 2006.^[21] J.B. Hunt expects the cost to employ drivers to continue its trend higher. Driver turnover rates can exceed 100% in a given year, and driver shortages could adversely impact operations^[22]. In 2006, the number of truck drivers was about 3,356,000^[23], but a good portion of drivers are reaching retirement age.

• Fuel Expenses: J.B. Hunt, along with its peers in the trucking industry, are relatively shielded from changes in fuel prices, because of a generally accepted fuel surcharge system, in which customers agree to pay established shipping rates plus or minus a change in diesel prices. However, if diesel prices continue to increase, it may be harder for the trucking industry to continue its practice of applying the expense to their customers. Fuel cost per gallon increased 13% between 2005 and 2006.^[24]

• Customer Concentration Risk: J.B. Hunt's top 10 customers accounted for 40% of its 2006 revenue. The trucking company's largest customer, Wal-Mart Stores (WMT), was responsible for 14% of total revenue^[25]. Some of J.B. Hunt's larger customers may be able to exert higher bargaining power than its smaller clients, and if one of these customers were to leave, it would have a substantial impact on the company's financial performance.

• Reliance on Third-Party Transporters: J.B. Hunt depends on third-party companies, like Burlington Northern Santa Fe (BNI) and Norfolk Souther (NSC), to help move goods in its intermodal segment. Disruptions in any of these firms could impact revenue and business relationships.

Competition

J.B. Hunt competes with a range of regional and national transportation and logistics companies. The trucking industry in highly fragmented as low barriers to entry exists (only need tractor and license). There are roughly 360,000 trucking companies (96% operate fewer than 28 tractors and 82% operate fewer than 6)^[26]. Transportation companies typically compete based on freight prices, service, reliability, transit times, and scope of operations.^[27]

Transportation of Goods

J.B. Hunt competes directly with other truckload carriers such as YRC Worldwide (YRCW), Old Dominion Freight Line (ODFL), and Conway Inc (CNW). J.B. Hunt also competes indirectly with railroad and air freight. Overall, the trucking industry tends to see periodic price decreases by firms, which try to capture extra business. Moreover, many customers use a bidding system, which tend to keep prices fairly competitive. For instance, Wal-Mart Stores (WMT) needs freight shipped, so asks several shipping firms to submit how much payment they are willing to accept. The lowest bid usually wins the contract.

J.B. Hunt uses relatively young tractors in order to minimize downtime and maximize utilization. The average lifetime of its tractor fleet is 2.2 years.^[28] By doing so, the company can achieve higher reliability rates and attract more business. J.B. Hunt is also focusing capital funding into its intermodal segment, which is experiencing the highest growth.

Market Share

The following table shows 20 of the largest Truckload and Less-than-Truckload companies. Some companies are a subsidiary of a larger corporation. For instance, FedEx Freight is owned by FedEx (FDX). Further, several of the listed companies earn a portion of revenues outside of transporting goods, such as warehousing and logistics. These instances usually account for less than 10% of the total sales. The total trucking industry revenue is estimated at $255.5 billion^[29].

Comparing Truckload and Less-than-Truckload Companies^[30]

References

1. ↑ J.B. Hunt Form 10-K, FY 2006, "Marketing and Operations", Page 6
2. ↑ J.B. Hunt Form 10-K, FY 2006, "Risk Factors", Page 7-9
3. ↑ Picture of JB Hunt Trailer
4. ↑ J.B. Hunt Form 10-K, FY 2006, "Risk Factors", Page 7-9
5. ↑ J.B. Hunt Form 10-K, FY 2006, "Operating Segments", Page 4-6
6. ↑ J.B. Hunt Form 10-K, FY 2006, "Operating Segments", Page 4-6
7. ↑ J.B. Hunt Form 10-K, FY 2006, "Operating Segments", Page 4-6
8. ↑ J.B. Hunt (JBHT) Form 10-Q, 3Q FY 2007, "Business Segments", Page 11
9. ↑ J.B. Hunt (JBHT) Form 10-Q, 3Q FY 2007, "Business Segments", Page 11
10. ↑ J.B. Hunt (JBHT) Form 10-Q, 3Q FY 2007, "Business Segments", Page 11
11. ↑ American Trucking Association
12. ↑ J.B. Hunt (JBHT) 3Q FY 2007, "Results of Operation", Page 14
13. ↑ J.B. Hunt (JBHT) FY 2006, "Selected Financial Data", Page 14
14. ↑ J.B. Hunt Form 10-K, FY 2006, "Year in Review", Page 18
15. ↑ J.B. Hunt Form 10-K, FY 2006, "Selected Financial Data", Page 15
16. ↑ J.B. Hunt Form 10-K, FY 2006, "Overview", Page 3
17. ↑ J.B. Hunt Form 10-K, FY 2006, "Consolidated Statement of Earnings", Page 39
18. ↑ Bureau of Transportation Statistics
19. ↑ J.B. Hunt Form 10-K, FY 2006, "Risk Factors", Page 7-9
20. ↑ US Federal Motor Carrier Safety Administration
21. ↑ J.B. Hunt Form 10-K, FY 2006, "Year in Review", Page 19
22. ↑ J.B. Hunt Form 10-K, FY 2006, "Risk Factors", Page 7-9
23. ↑ US Bureau of Labor Statistics
24. ↑ J.B. Hunt Form 10-K, FY 2006, "Year in Review", Page 18
25. ↑ J.B. Hunt Form 10-K, FY 2006, "Risk Factors", Page 7-9
26. ↑ TruckInfo.Net
27. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Competition", Page 4
28. ↑ J.B. Hunt (JBHT) Form 10-K, FY 2006, "Revenue Equipment", Page 7
29. ↑ TruckInfo.net
30. ↑ Hoovers