Since I'm psyched that a new season of Ice Road Truckers kicks off on Sunday, I decided to look at the trucking sector. Back in September, David "Stocks Under $10" Peltier looked at Swift Transportation (SWFT) and said he thought the stock would keep on truckin' higher.
Despite a weak economy, I'm optimistic that J.B. Hunt Transport (JBHT) can move higher simply because business keeps getting better, albeit slowly. The Cass Freight Index continues to improve, and the trucking stocks are often a leading indicator of economic recovery.
J.B. Hunt is one of the largest freight transport services in the U.S. The company's "shore-to-door" service puts an emphasis on long-term customer relationships and transport solutions rather than on lower-margin spot shipment services. The spot0shipment market is highly competitive with large price fluctuations. The truckload freight delivery industry grows about 2% a year and generates some $300 billion in revenue. The top 10 trucking carriers represent less than 10% of industry revenues.
J.B Hunt operates 8,500 tractor-trailers and has contracts with more than 1,300 owner-operators. The company operates in four segments, including intermodal, dedicated service contracts, truckload services, and integrated capacity services.
Today, intermodal transportation represents 56% of revenues and 68% of the company's operating income. In the quarter, intermodal reported revenue of $691.3 million, up 24.0% year over year. J.B. Hunt has invested heavily in the intermodal business spending nearly $800 million since 2005 and 2006. The dedicated contract-services business unit represents 24% of revenue and 24% of operating income. J.B. Hunt's largest customer in the dedicated contract service segment is Wal-Mart (WMT).
Industry-wide freight volume is believed to have bottomed out in May 2009, and it has modestly recovered along with the economy. According to the Cass Freight Index, freight shipments were up 7.5% in September, on top of a 4.4% increase in August. While this was in line with the seasonal trend, management has been optimistic about the remainder of the year. In fact, revenue should grow about 9% next year, with a chance that margins will modestly improve by 50 basis points. Should that happen, earnings per share could grow 17% to $2.46. With a decent holiday season and a better economic outlook next year, I believe JBHT could easily reach the mid-$40s by early 2012.