JBHT - J.B. Hunt: Hold The Bullish Momentum Is Weakening

2023-09-29 07:30:17 ET

Summary

• J.B. Hunt has shown a decade of commitment to shareholders through dividends and share buybacks, resulting in a total return of about 180%.
• The company's financial outlook is promising, supported by strong customer relationships and solid financial performance.
• JBHT's profitability and financial strength are solid, with higher margins and lower debt-to-equity ratios compared to industry averages.
• Based on relative valuation and technical analysis, I rate the company a hold as the peak is almost here.

Investment Thesis

J.B. Hunt Transport Services, Inc. (JBHT) has shown its commitment to its shareholders for more than a decade through dividend payments and share buybacks. Although this makes the company attractive to investors, I am hesitant to recommend it to potential investors because it appears to be trading at a premium. However, I recommend holding the stock to current investors because its financial strength and profitability are very assuring.

Further, the company's financial outlook is very promising and realistic and reflects the company's commitment to delivering to its shareholders. Its financial outlook is strongly supported by strong levers such as its strong customer relationship, which I believe will be critical for the company's financial success. Based on my assessment from the above perspectives, I think the opportunity here is for current investors to hold on to their current positions; potential investors should wait for a better entry point, perhaps when the technical analysis improves the stock performance outlook.

JBHT Commitment To Shareholders: A Decade Of Success To Shareholders?

JBHT has been committed to returning capital to its shareholders through dividends and share buybacks over the last decade. I believe this has made it a successful decade for the shareholders, as reflected in an outstanding total return of about 180%.

Here are some trends and comparisons of JBHT's cash givebacks:

Dividends: Since 2004, the company has paid quarterly dividends , and since 2013, it has raised the payout per share annually.

Over the last ten years, the company's dividend growth rate has been exceptional, averaging 14.6% annually. However, its dividend yield has been relatively low compared to its peers in the transportation and logistics business, averaging 0.9% over the last decade. This, in my opinion, reflects the company's strong stock performance and its cautious payout ratio, which has averaged 23.5% over the last ten years.

The company declared a regular quarterly dividend of $0.42 (42%) per common share in its most recent dividend declaration, an increase of 5% from the previous quarterly payout, further marking its consistency in growing its dividends over time. Given the company's solid financial footing and relatively low dividend payout in relation to its retained earnings, I believe the dividend will remain stable for the foreseeable future. The dividend scorecard is attractive, with the exception of the low dividend yield that I have explained and which I anticipate will rise in the future.

Share buybacks : JBHT has repurchased its common stock since 2007, and its outstanding shares have been reduced by about 19.6% during the last ten years. After temporarily suspending the buybacks in the fourth quarter of 2020 due to concerns over COVID-19, J.B. Hunt repurchased shares in the amount of $150 million in 2021. JBHT bought almost 315 thousand shares for $53 million in the second quarter of 2023. As of June 30, 2023, JBHT still had about $467 million left in its share buy authorization. Also, in July, the company announced its Board of Directors had approved a new share repurchase program allowing the business to buy back an extra $500 million worth of common stock.

In summary, JBHT has consistently increased dividends and repurchased shares over the previous decade, demonstrating a solid commitment to its shareholders. The company's cash returns have been bolstered by strong profit growth and cash flow generation. JBHT has a smaller dividend yield than its peers in the industry but a greater dividend growth rate and a lower payout ratio, which I believe makes it sustainable with strong growth potential. In addition, the corporation has a substantial repurchase program that allows it to return capital when opportunities arise. These attributes, in my opinion, make JBHT highly appealing.

Profitability And Financial Strength

I will use different key financial indicators and ratios to assess the company's profitability. To do the analysis, I will consider the 2022 FY . Here is my assessment:

Gross margins : JBHT's gross margin was 11.15% in 2022, which was lower than the industry average of 14.02%. This suggests that the company faces higher costs or lower prices than its peers.

Operating margin: In 2022, its operating margin was 8.82%, better than the industry average of 7.67%. In my opinion, this shows that the corporation has superior cost control and operational efficiency than its peers.

Net margin: JBHT's net margin was 6.54%, which was higher than the industry average of 5.23%.This suggests that the company has a more robust bottom-line performance and profitability than its peers.

This strong performance in 2022 was a continuation of the company's solid financial performance, as shown below, which further lends credence to my assertion that the company has solid financial strength and profitability.

Further to support its financial strength are the following important ratios;

Current ratio: JBHT's current ratio is 1.21, which is higher than the industry average of 1.18. This suggests that the company has sufficient liquidity and working capital management than its peers.

Debt-to-equity ratio : Its debt-to-equity ratio was 42.85% as of December 31, 2022, which was lower than the industry average of 51.77%. This suggests that the company has moderate leverage and financial risk than its peers.

Return on equity : The company's return on equity was 28.58%, higher than the industry average of 18.32%. This suggests that the company has superior profitability and efficiency in using its equity capital than its peers.

In conclusion, based on this data, it is reasonable to argue that JBHT's profitability and financial strength are very solid, which bodes well for shareholders in terms of sustainable dividend growth and consistent share buybacks. This can be affirmed by the new share buyback authorization and the revised dividend payment per share, trends I expect to continue in the future.

Relative Valuation And Technical Analysis

Based on relative valuation metrics , JBHT appears to be trading at a premium. Considering PE, PS, and PB ratios, the company's 22.77, 1.40, and 4.93 values are above the industry median of 18.84, 1.32, and 2.45, respectively. This suggests that JBHT is overvalued relative to its peers. Therefore, investors are paying a premium for JBHT's earnings, sales, and book value compared to other companies in the same industry. One main reason I believe has resulted in the premium pricing is the company's strong profitability and financial strength. Further, its commitment to shareholders through share buybacks could be another reason for the premium pricing. Given this premium pricing, I think it's good to consider the technical analysis to make a sound investment decision.

In the technical analysis, I focused on several indicators explained below;

Moving averages : JBHT is currently trading above its 50-day, 100-day, and 200-day moving averages, which indicates that it is in an uptrend and has a positive momentum. The 50-day moving average is also above the 100-day and 200-day moving averages, which suggests that the short-term trend is stronger than the long-term trend. However, the gap between the moving averages is narrowing, which implies that the uptrend may be losing steam, and a potential reversal may occur.

Trend lines: The upper trend line (red line) acts as a resistance level, while the lower trend line (blue line) acts as a support level. JBHT bounced off the lower trend line and is approaching the upper trend line, which suggests that it may face some selling pressure near the resistance level.

RSI: JBHT's relative strength index [RSI] is currently at 54.1, which indicates that it is neither overbought nor oversold.

However, the RSI has been showing a negative divergence with the price, which means that the RSI is making lower highs while the price is making higher highs. This suggests that the bullish momentum is weakening, and a possible reversal may occur.

In summary, JBHT's technical analysis shows it is in an uptrend and has a positive valuation outlook based on its moving averages, trend lines, and chart patterns. However, it also faces challenges and risks based on its narrowing moving average gaps, approaching resistance level, and negative RSI divergence. Therefore, investors should be cautious and watch for trend reversal or correction signs. This observation and the relative premium pricing bring me to a hold rating because there is a minimum upside to hit the resistance zone that current investors can exploit. I believe this will be propelled by the current momentum, as shown by the moving average.

My Investment Decision

Although JBHT is attractive based on its profitability, financial strength, and commitment to shareholders, I rate the company a hold because it is trading at a premium based on relative valuation metrics. Further, based on my technical analysis, the bullish trend is weakening, and the stock is approaching its resistance zone, where a reversal is very likely. Given this background, the opportunity is for current investors to hold and exploit the remaining and weakening momentum. For potential investors, wait for a better entry point, perhaps when the RSI falls to about 40.

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