JB Hunt (JBHT) analysis: The bumpy ride won’t kill

The COVID-19 outbreak has thrown economies into a recession, and the logistics industry is one that does not enjoy the luxury of sustaining while working from home. It has seen diminishing demand since the start of the US-China trade war and now, an extension to the bearish outlook has taken a toll on the sector. Markets have been quick to reflect the grim scenario. S&P Transportation Exchange Traded Fund Index has fallen 31.84% QTD, and investors have remained sluggish ever since.

While a number of carriers have been pushed to bankruptcy, JB Hunt (NASDAQ: JBHT) seems well on a stable path backed by sound financials and liquidity.

From the words of JB Hunt CEO John Roberts, “So as far as going into a downturn and then how we come back out, I think we’ll be more nimble and more quick to be able to respond.” Measures in multiple directions are set to keep the company up & running, during the crisis and beyond.

Rebalancing in an asset-heavy industry

JB Hunt operates in an asset-heavy industry with five lines of business, carrying essentials and non-essentials. Once the pandemic hit, transportation of non-essentials declined, essentials shot up, and the company had the flexibility to move around assets across segments. Although it hit capacity utilization, operations weren’t entirely disrupted.

Click here to see JB Hunt Q1 2020 Earnings INFOGRAPHIC

The crisis could have been unanticipated, but the investments in technology infrastructure have enabled them to work from home (90% at the corporate office level, 50% in the field locations). It has also given them the ability to remain connected with customers and drivers to keep them operational.

Volumes are projected to decline, at least by about 20%. Since the logistics industry faces derived demand, JB Hunt can operate on full capacity only if production resumes in the other industries.

In the long term, the company is keen on keeping its strategic direction sacrosanct. The focus is consistent, “to serve for customer’s needs.” The company expects to see demand return once the pandemic subsides and hence, it is not going to spend time on bringing in new orders; it can kick start soon after the crisis.

[irp posts=”56482″]

Cost controls and financials

In the Q1 2020, diluted EPS fell by 10% to $0.98. Although the revenues beat forecasts, earnings missed consensus estimates. A probable explanation is that demand in the quarter was largely stolen from the future, driven by pandemic-related hoarding. The company had to incur an unexpected operating expense – bonus to their drivers – of approximately $12 million. 

The company is engaged in cost control to uphold margins. It has cut down on discretionary spend that it deems non-essential, and paused hiring activities. It has reduced capex, delaying or canceling orders for tractors or containers it had placed. Capex projections have gone down by about $100 million, from $675 million to $575 million. However, the company said it is keen on continuing the investments in people, technology, and scaling the platform.

[irp posts=”55999″]

The balance sheet strength is supporting JB Hunt in all its measures. It has the credit resources to go beyond the target leverage ratio. It has the financial flexibility to raise debt to the extent of approximately $750 million to $1 billion. Corporate debt ratings are assured to remain intact at investment grade. This also translates into a stable liquidity position for the company, with $48 million in cash, as of Q1 2020.

Although the company has not decided to suspend dividends, it continues to remain opportunistic by suspending share buybacks in the interim period and retaining cash instead. The company is more focused on providing a return on capital rather than a return of capital.

According to Frost & Sullivan, “During this difficult time, it is essential for logistics companies to have an immediate focus on enabling end-to-end visibility, agility, process flexibility, and collaboration to support their customers in anticipating disruptions and mitigating the respective impacts.” JB Hunt seems to have touched upon every aspect of this statement.

(Written by Manjula S)