Depressed Rates in the Competing Truckload Sector Weighing on J.B. Hunt's Intermodal Yields

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 47% of Hunt's total revenue in 2022.

Hunt isn't immune to downturns, but over the past decade-plus it's reduced its exposure to asset-based truckload shipping, which represents about 30% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt 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. 

Truckload capacity was extremely tight from mid-2020 through much of 2022, thus contract pricing soared across all modes, while intermodal demand jumped on the retail restocking boom. That said, the onset of rail service shortfalls in second-half 2021 throttled Hunt's container volumes despite positive demand. Service levels have recovered over the past year (a positive for truck-to-rail conversions), but retail end market demand softened on sluggish restocking activity. Overall, we expect 2023 to be a year of normalization for the trucking and intermodal markets, before recovering in 2024. 

Hunt's long-term growth prospects remain favorable, especially for intermodal. Our outlook isn't without risk, but we expect normalized real U.S. retail sales growth and truck-to-rail conversions to support 3.0%-3.5% intermodal-market 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 quite difficult for a small competitor to replicate Hunt's vast in-house drayage capabilities (more than 6,000 tractors) and fleet of more than 100,000 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 a 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 large network of shippers and long-standing partnerships with major 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 and discounts), and its industry-leading container fleet acts as a highly valuable source of capacity.

From the perspective of the Class I rail carriers, Hunt is an attractive source of cargo because of its ability to aggregate fragmented demand across an immense pool of shippers looking to capitalize on multimodal capabilities.

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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