What’s Driving Heartland America? (Part 2)

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What’s Driving Heartland America? (Part 2)

Where the rail companies are expected to get a boost from a rebounding economy, so should the trucking companies. As the U.S. starts to see some steadying of its economy, we should see an increase in products moving across America. Trucking companies are one of the key transporters of these products. The top trucking companies moving across the U.S. include: J.B. Hunt Transport Services (NASDAQ: JBHT)C.H. Robinson (NASDAQ: CHRW)Arkansas Best Corporation (NASDAQ: ABFS) and Con Way (NYSE: CNW)

The overall economy also started showing signs of growth:  Unemployment came in at 8.3% in July, and by the end of September had fallen to 7.8%. The Federal Reserve also recently released numbers that show members and bank presidents predicting 2.0% to 3.2% of GDP growth in 2013. The strengthening in the economy has helped lift freight volumes since mid-2009 and the trucking market is one of the top growth markets when the economy is in turnaround mode.

J.B. Hunt is one of, if not the, best-value trucking companies in the U.S. The trucker gets around 60% of its revenues from its transport services, utilizing contracts with North American rail carriers to provide intermodal freight solutions. Intermodal services provided by truckers should continue to perform well going forward, as shippers convert from rail to truck. J.B. Hunt expects upwards of double-digit intermodal volume growth over the near-term. J.B. Hunt expects to continue its robust investment plan for adding intermodal containers. The company also plans to expand into Mexico, diversifying its geographical services. One of the big draws for investors getting into J.B. Hunt is ample growth opportunities. The trucking company only has about 2% of the current market, leaving the door wide open for market expansion and penetration. The upcoming plans to invest in equipment should prove effective in capturing more market share. For 2012 the company saw 8% improvement in load count and over 2% improvement in core pricing. J.B. Hunt has also increased its initiatives to return capital to shareholders by raising its dividend payment 8.3% in 2011 and 7.7% in 2012. A step further, the company also put in place a share repurchase program of $500 million. 

Old Dominion (NASDAQ: ODFL) is another top performer in the industry, operating less-than-load carriers, as opposed to truckload carriers. This trucker is expected to see growth in core pricing for 2013 of 3% and 6.5% in volume growth. Helping spur this growth will be Old Dominion's initiatives for expansion, which included opening three service centers in 2012. Where J.B. Hunt trades relatively in line with its peers on a valuation basis, Old Dominion trades below the other major transporters at 16 times earnings and 11.5 times operating cash flow (check out all the hedge funds owning Old Dominion). 

 

J.B. Hunt

Arkansas Best

C.H. Robinson

Con-Way

Expeditors

Price to Earnings (next year earnings)

21

19

21

13

23

Price to Operating Cash Flow

14.2

3.3

22.3

5.3

24

 C.H. Robinson and Expeditors are international trucking operators. Con-Way operates both truck load and less than truckload. Arkansas Best operates in fifty states. With the slowdown in the economy, major truckers have been ramping up asset optimization and utilization  J.B. Hunt appears to be leading the way. The margins and returns, namely return on equity, is well above its peers for J.B. Hunt, further reaffirming my interest in the stock:

 

J.B. Hunt

Arkansas Best

C.H. Robinson

Con-Way

Expeditors

EBITDA Margin

15%

4%

7%

8%

10%

Return on Equity

30%

14%

--

25%

--


While the trucking group might under-perform during slow economic times, it should manage to flourish as the economy strengthens, this includes my two top picks J.B. Hunt and Old Dominion. Both of these companies have impressive long-term estimated earnings growth, according to Wall Street. J.B. Hunt is expected to grow at around 20% and Old Dominion at 15%. In coupling the valuation (price to earnings) and growth prospects, we can look at the PEG ratios to see just how 'expensive' the growth is. Both J.B. Hunt and Old Dominion have PEG ratios of 1.2, suggesting they are indeed undervalued. Billionaire Ken Griffin - founder of Citadel Investment Group - owns one of the largest stakes of Old Dominion by hedge funds (check out Ken Griffin's newest picks). 
 
 

J.B. Hunt

Arkansas Best

C.H. Robinson

Con-Way

Expeditors

Price to Earnings to Growth

1.2

--

2.1

0.8

1.8

 


mhargra has no position in any stocks mentioned. The Motley Fool recommends Genesee & Wyoming. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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