Is J.B. Hunt a Buy after Earnings?
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No downturn here: J.B. Hunt Transport Services (NASDAQ: JBHT), the largest publicly traded American trucking company by market cap (at $6.4 billion), reported on Oct. 11 that during the third quarter of 2012 both its revenue and earnings had grown at double-digit rates compared to the third quarter of 2011. Revenue was up 11%, narrowly beating expectations; margins grew a bit, with earnings rising 14%, though this slightly disappointed the market. At J.B. Hunt’s largest segment, intermodal operations, sales were up 15%, with this growth coming entirely from higher volumes. These figures are not only positive for the company itself, but indicate that the economy did well in the third quarter in order to generate so much demand for transport services.
J.B. Hunt now has $2.50 in trailing earnings per share, implying a trailing P/E of 23. Wall Street analyst consensus- which, recall, the company came very close to meeting in this past quarter- is for an even $3 in EPS in 2013. This yields a forward P/E of 19, which is a bit cheaper; but we don’t think that the trucking company can continue this growth rate on a long-term basis, so it may be overvalued in the market. The company has authorization to repurchase up to $500 million or so in shares, and did not carry out any buybacks during the quarter; perhaps this was because management did not consider the share price a bargain.
Hedge fund interest in J.B. Hunt dropped in the second quarter of the year. While Jeffrey Vinik’s Vinik Asset Management and Israel Englander’s Millennium Management both had substantial positions in the stock at the end of June (about 280,000 and about 100,000 shares, respectively), these were 60-70% decreases from what they had owned at the beginning of April. It is quite possible that these funds have since sold out of the company completely. See more investment activity from Vinik Asset Management and from Millennium Management. Matthew Grossman’s Plural Investments was one fund which moved in the opposite direction: Plural initiated a position of about 170,000 shares during the second quarter (find more stock picks from Plural Investments).
We would compare J.B. Hunt to fellow trucking companies Old Dominion (NASDAQ: ODFL), Landstar System (NASDAQ: LSTR), Werner (NASDAQ: WERN), and Con Way (NYSE: CNW). These four companies’ trailing P/E multiples cluster between 13 and 18, meaning that the larger J.B. Hunt carries a considerable premium relative to its peers. Looking at the second quarter of 2012, each of these four competitors saw their own earnings increase by at least 10% versus a year earlier, and all except for Werner grew their earnings by at least 20% (J.B. Hunt’s had grown by 23% in that same period).
Werner, whose earnings had increased 12%, trades at 14 times forward earnings estimates. We don’t think that its business is doing worse than the larger trucker’s that it should trade at such a discount. Old Dominion and Landstar had about matched J.B. Hunt’s previous earnings growth rate and now trade at 13 and 16 times consensus earnings for 2013, respectively. Again, it’s difficult to see why J.B. Hunt deserves such a large premium, particularly over Old Dominion. Finally, Con Way’s forward P/E is only 10 and it saw the highest earnings growth rate in the second quarter. It is small, at a $1.6 billion market cap, but we think that it may be an even better buy.
On the macro front we’re cheered that J.B. Hunt is doing well, but we struggle to see a value thesis for the stock. Its peers- particularly Con Way and Old Dominion- seem to be better priced.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.