J.B. Hunt's Core Intermodal Business Still Navigating Intense Trucking Sector Competition

Senior Equity Analyst

Matthew Young

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At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with BNSF Railway in the West in 1990, followed by an agreement with Norfolk Southern in the East. Hunt has established a definitive leadership position in intermodal shipping, with a 20%-plus share of a $30 billion industry. The next-largest competitor is Hub Group, followed by the intermodal divisions of Schneider National, STG Logistics, and Knight Swift. Intermodal made up around 48% of Hunt's total revenue in 2023.

Hunt isn't immune to downturns, but over the past few decades, it's reduced its exposure to asset-based truckload shipping, which represents about 34% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. It is also shifting its for-hire truckload operations to more of an asset-light model via its drop-trailer offering and owner-operators, while investing in asset-light truck brokerage and final-mile delivery. 

The onset of rail service shortfalls in second-half 2021 throttled Hunt's container volume despite positive demand trends linked to the pandemic-driven retailer restocking surge. Service levels recovered in late 2022 and 2023 (a positive for truck-to-rail conversions), but retail end-market demand softened on elevated inventory levels. Thus, 2023 was a challenging year of normalization for the trucking and intermodal markets. 2024 should bring intermodal volume and pricing stabilization as demand trends improve and competition from the truckload industry eases, but this will be a factor to watch closely. 

Hunt's long-term growth prospects remain favorable, especially for intermodal. Our outlook isn't without risk, but we expect normalized real US retail sales growth and truck-to-rail conversions to support 2.5%-3.0% broader intermodal industry volume expansion on average over our forecast horizon, with 2.0%-2.5% core pricing gains. We suspect Hunt will modestly outperform those trends, given its favorable competitive positioning on BNSF's rail network.

Business Strategy & Outlook

Because the for-hire full-truckload industry can be a tough business in which to differentiate, our narrow moat rating for J.B. Hunt primarily stems from the company's intermodal shipping operations, which benefit from a combination of the network effect and scale-based cost advantage. In terms of scale, it would be difficult for a small competitor to replicate Hunt's vast in-house drayage capabilities (more than 6,300 tractors) and fleet of more than 115,000 53-foot-high cube containers capable of double stacking—by far the largest in the industry. The firm's intermodal container fleet provides preferred access to rail capacity and would be costly to replicate. Preferred access is no small edge, given that the truck-versus-rail decision for shippers is heavily influenced by service levels (in addition to the cost gap). We think this is one key reason Hunt has outperformed its peers in terms of container volume growth (on average) over the past decade.

The concept of the network effect suggests that the value of a service becomes more powerful and tougher to replicate with more buyers and suppliers. In its core intermodal business, Hunt's massive network of shippers and long-standing partnerships with Class I rail carriers reinforce a compelling value proposition and generate healthy barriers to entry because duplication by small providers with fewer resources would prove difficult. For shippers (customers), the firm's immense customer base affords significant buying power (greater rail capacity access—which is finite—and discounts), and its industry-leading container fleet acts as a highly valuable source of capacity. Intermodal services are also highly convenient, providing for a single freight bill and shipment reporting, including track and trace from origin to destination, which makes for a seamless transaction. 

From the perspective of suppliers—the Class I railroads—Hunt is a very attractive source of cargo because of its ability to aggregate fragmented demand across an immense pool of retail end-market shippers (across the size spectrum) looking to capitalize on multimodal capabilities.

Over the longer term, we expect secular constraints on full-truckload capacity growth to keep the intermodal value proposition strong by prompting shippers to turn to multimodal solutions, especially during periods of tight truckload supply. Key headwinds to truckload industry capacity, which make intermodal more attractive, include the limited driver pool and gradually intensifying regulatory restrictions. We think Hunt remains well positioned to capitalize on truck-to-rail conversions (especially on shorter-haul lanes in the Eastern US) over the next decade thanks to its vast network of shippers and long-standing relationships with the major Class I railroads. Its highly favorable pricing arrangement with BNSF stands as a testament to the firm's healthy rail relationships. Despite intermittent headwinds from rail service snafus, intermodal shipping will continue to play a crucial role in the future of US transportation, and Hunt is well positioned to benefit from the mode's long-term growth potential while also keeping the competition at bay. 

During the past five years, Hunt has generated a total average adjusted return on invested capital of more than 16%, which compares favorably with our approximate 8.5% cost of capital estimate. The 10-year average is near 17%. Fluctuations over the years have primarily come from cyclical changes in freight demand and pricing.

Narrow

Economic Moat

J.B. Hunt Transport Services

J.B. Hunt Transport Services, Inc. engages in the provision of logistics solutions. It operates through the following segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), Final Mile Services (FMS) and Truckload (JBT). The JBI segment offers intermodal freight operations for rail carriers. The DCS segment includes private fleet conversion and final-mile delivery services. The ICS segment provides single-source logistics management for clients who intend to outsource their transportation activities. It offers flatbed, refrigerated, expedited, less-than-truckload, dry-van, and intermodal freight services. The FMS segment provides final-mile delivery services to customers through a nationwide network of cross-dock and other delivery system network locations. The JBT segment is responsible for full-load, dry-van freight that is transported via roads and highways. The company was founded by Johnnie Bryan Hunt, Sr. and Johnelle D. Hunt on August 10, 1961, and is headquartered in Lowell, AR.

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