J.B. Hunt: Of Trucks, Trains and the Economy

If you want to know where the U.S. economy is headed, hitch a ride with J.B. Hunt Transport Services. The trucking and logistics company is a good gauge for the economy because the majority of its business involves transporting goods to retailers’ shelves and to home builders. Helped by lower fuel costs, the company reported third-quarter earnings that beat Wall Street’s. The question for investors now is whether Hunt and, by proxy, the U.S. economy will keep on rolling.

The odds have slightly favored Hunt for the past three months. Two of firm’s three divisions generated more sales and profits in the third quarter than the same time last year. The Lowell, Ark., company says that third-quarter net income rose to $57.8 million, or 39 cents per share, from $39.8 million, or 25 cents per share, during the same quarter in 2005. The company’s earnings per share drubbed the average analyst estimate by 2 cents.

Rail operations helped Hunt catch its gravy train. Sales at the company’s rail services improved 12% to $366 million as shippers sought cheaper alternatives than truck transport, even for shorter routes traditionally handled by big rigs. Hunt’s intermodal division provides stackable containers that shippers prefer to use when they haul materials by rail. In fact, the company has the largest private fleet of such containers. It’s not just the number of containers that give Hunt a competitive edge, but also its relationship with railroads. For example, J.B. Hunt cargo gains top loading priority when shipped on Burlington Northern Santa Fe, the company’s largest railroad ally. Hunt’s pull with railroads means customer shipments are more likely to arrive on time, essentially for its big customers, such as Wal-Mart.

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Outsourcing has benefited Hunt, as with the U.S. economy at large. Shippers looking to rid themselves of expensive truck fleets buy outsourced transport from Hunt under three- to five-year contracts. That division generated a 9% increase in sales of $239 million in the third quarter and allows the company to hedge to some degree against the cyclical nature of the shipping business.

The bottleneck in Hunt’s convoy of businesses has been its traditional stronghold of trucking. Revenue for the quarter was essentially flat at $259 million, and operating income fell 11%. The results for the quarter actually were better than expected because of lower fuel costs, says Credit Suisse analyst Jason Seidl.

Much like the overall U.S. economy, Hunt’s outlook is a mixed bag. Its trucking business will continue to weaken as the economy slows, Seidl says, but that slack will be offset by modest growth from the rail division. Lower fuel prices will aid Hunt along with most of the economy. As for the stock (symbol JBHT), shares seem fairly priced. Seidl gives the stock at a "neutral" rating. Recently $22, Seidl’s target price, the stock trades at 14 times the $1.57 per share analysts expect the company to earn in 2007. It is 15% off its all-time high this year of $26.