JBHT - J.B. Hunt: Navigating Uncertain Waters In The Freight Industry - A Neutral Perspective

2024-01-07 00:47:31 ET

Summary

• J.B. Hunt Transport Services faces challenges in the freight and logistics industry, but its strategic initiatives show potential for long-term growth.
• The company's financial performance has been impacted by the freight recession, with decreased revenue and profit margins.
• J.B. Hunt's future plans include partnerships, acquisitions, and technological advancements to enhance efficiency and expand its market reach. However, its high valuation and macroeconomic uncertainties warrant a neutral stance.

Thesis

J.B. Hunt Transport Services (JBHT) finds itself in a challenging freight and logistics industry. The company tries to deal with the challenges by responding to the current freight recession. While I am convinced that the company's initiatives such as the BNSF partnership and the J.B. Hunt 360 platform show potential for long-term growth, the current market volatility and financial uncertainties make me choose a neutral position on the stock.

Introduction

J.B. Hunt Transport Services is a transportation and logistics company in the United States. Their specializations are in providing transportation and delivery services, such as:

• Truckload freight shipping
• Intermodal transport (which involves moving freight in containers using multiple modes of transportation, like trucks and trains)
• Dedicated contract services (where they provide customized transportation solutions to specific customers).

J.B. Hunt Transport Services is an important business in the logistics and freight industry and in helping to move goods and materials across the country.

Financial Performance

Source: Seeking Alpha (Retrieved on 01-03-2024). Financials in millions USD.

Revenue and profit margins have decreased big time in 2023. It’s mainly caused by the presence of the so-called "recession freight". FreightWaves.com has written an interesting article about it. The term "freight recession," refers to a downturn in the freight industry characterized by economic challenges and market changes. This recession doesn't necessarily mean a general economic recession but you should think of it rather as a specific recession/downturn within the freight and trucking sector.

The freight recession in 2023 was the built-up consequences of multiple factors that have together created a challenging environment for the freight and logistics industry.

The most important factors include:

The slowdown in the global economy has led to a decreased demand for pretty much all goods. This slowdown was a result of reduced consumer spending in 2023. Decreased consumer spending causes lower production and less demand for goods to be transported. This has been, I'd say, the main reason for the decreased revenue of J.B. Hunt Transport Services.

An oversupply of freight capacity has caused a decrease in freight rates. This overcapacity was most probably caused by previous periods of high demand. Because of the higher demand and consumer spending, companies have previously increased capacity. However, now, the capacity is not fully utilized due to reduced demand.

Moreover, due to inflation, there was an increase in operational costs, such as fuel prices. This can squeeze profit margins for freight and logistics companies, making it harder for them to operate profitably.

A trend has emerged where smaller carriers have intensified competition in the freight market. This trend has led to price wars and reduced margins for established players such as J.B. Hunt Transport Services. This can also be observed in the financial data as their operating and profit margin have decreased significantly over the year.

The freight recession is/was not just an issue for J.B. Hunt Transport Services but for the whole industry. We’ll get more into those numbers in the valuation section.

Not only have these trends impacted the numbers on the top of the income statements but also almost every number near the bottom. So we’re talking decreased gross profit and net profits. Moreover, the profit margin has decreased significantly.

The Future

Let’s get further into depth about whether the future looks better.

A CNBC article stated that:

Alan Baer, CEO of OL USA, who participated in and reviewed the survey, tells CNBC the results indicate a freight market that will have little to no growth during the first half of 2024, which means stable to downward pricing, and hopes that during the second half of 2024 volume increases.

This prediction is in line with other predictions of experts .

To make the best out of this difficult situation, J.B. Hunt Transport Services has set up several initiatives. For further research on these initiatives, I went to look at the most recent earnings call .

One step is their joint initiative with BNSF, which looks to improve Intermodal capacity and service for customers. Intermodal capacity can be defines as the ability to move goods using several modes of transportation without any handling of the freight itself when changing modes. Moreover, the partnership with BNSF is crucial for optimizing supply chain solutions. I believe that this is a decent strategic move towards better efficiency and value, thus leading to better profit margins.

Additionally, the acquisition of the brokerage assets of BNSF Logistics means that there could be a great advantage in the company's expansion. Think about it, this acquisition not only broadens J.B. Hunt's service capabilities. It also leverages technological advancements and customer service strengths. I believe this will create new opportunities in the supply chain sector, potentially bringing in additional revenue.

The company continues to focus on the J.B. Hunt 360 platform. I believe that such initiatives show the company's commitment to technology-driven solutions, which I am always a huge fan of. This platform stands central to driving efficiency and providing asset-light solutions. These are more and more important in the modern logistics landscape. In the Truckload segment, the growth of the J.B. Hunt 360box product looks good. This is a service that combines drop trailer capacity with effective carrier sourcing. The success of these products shows a growing demand for innovative logistics solutions in the market.

Overall, I'd say that the company has set up some decent investments to set up long-term growth.

However, with the expected macroeconomic situation, I do believe the company won’t reach overall significant positive revenue and profit growth in the short term. I do believe however that the “damages” of the macro-economic situation can be limited with these initiatives. More importantly, I think that these are good medium and long-term investments.

Valuation

Source: Yahoo Finance. The industry medians are calculated with data available from 6 large market cap companies in the Integrated Freight & Logistics industry. Data is retrieved on 01-03-2024.

J.B. Hunt's P/S ratio of 1.51 is significantly higher than of the industry median of 1.08. However, it is lower than the S&P 500 median of 2.64. With a P/E ratio of 25.92, J.B. Hunt is valued higher than both the industry median of 20.05 and the S&P 500 median of 23.99. J.B. Hunt’s gross margin of 0.18 is slightly below the industry median of 0.2 and significantly lower than the S&P 500 median of 0.43. This indicates that the company is less profitable than its industry peers and much less profitable than the average S&P 500 company in terms of gross profit. The revenue growth is better than that of the industry, however, earnings took a much bigger hit YoY.

I do believe that J.B. Hunt Transport Services invested in some interesting long-term initiatives, which is why I would be okay with a premium above the industry. However, the premium right now is just too high for me. I'd rather expect a premium of let's say 10%-15% compared to the industry. The same goes compared the S&P 500, with all the risks in play I wouldn't pay a 26 P/E ratio compared to the cheaper and more stable 24 P/E ratio of the S&P 500 right now.

Conclusion

J.B. Hunt Transport Services is tackling challenges such as the freight recession and increased market competition with initiatives such as the BNSF partnership and the development of the J.B. Hunt 360 platform. I believe that these initiatives will improve efficiency and flexibility in a shifting market. While J.B. Hunt's approach in these challenging times is admirable, its current financial performance, coupled with a significant revenue drop, high valuation metrics compared to industry standards, and the ongoing freight recession, makes me set the stock at a neutral position instead of a buy. Hunt's position in the market. When the valuation drops to either the median of the industry, a discount to the S&P 500 based on P/E, or a more positive short-term outlook, I am willing to review the case of J.B. Hunt Transport Services.

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