Acquiring Intermodal Assets Will Expand Capacity And Align With Major Retailers

Key Takeaways

• Walmart's Intermodal assets acquisition and record volumes can enhance future earnings, revenue growth, and margin improvement.
  
• Investing in capacity, technology, and cost control boosts scalability, positively impacting margins and long-term capital returns.
  
• The company faces margin pressures from cost environments and capacity issues, while declining revenue and market uncertainties challenge future earnings and growth.

Catalysts

Provides surface transportation, delivery, and logistic services in the United States.

• The acquisition of Walmart's Intermodal assets enhances future earnings potential by increasing capacity and providing opportunities for greater revenue from alignment with a major retailer.
  
• Executing two consecutive quarters of record Intermodal volumes and focusing on rebalancing and repricing their book of business can drive future revenue growth and margin improvement.
  
• Resilient performance in the Dedicated Contract Services segment suggests a strong pipeline of growth opportunities, which could lead to higher revenue and operating income as the fleet expands and returns to net fleet growth.
  
• Continued investment in people, technology, and capacity positions J.B. Hunt to effectively scale its operations and improve long-term returns on capital, impacting net margins positively.
  
• The company plans to focus on cost control and seeks to pass inflationary costs onto shippers in 2025, which could lead to improved margins and earnings as these efforts align with operational excellence initiatives.

J.B. Hunt Transport Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming J.B. Hunt Transport Services's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 6.5% in 3 years time.
• Analysts expect earnings to reach $934.7 million (and earnings per share of $9.7) by about January 2028, up from $570.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.7x on those 2028 earnings, down from 30.4x today. This future PE is lower than the current PE for the US Transportation industry at 29.9x.
• Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

J.B. Hunt Transport Services Future Earnings Per Share Growth

Risks

• The deflationary rate environment and inflationary cost environment, particularly related to insurance premiums and people costs, have weighed on margins and could continue to do so, impacting net margins and earnings.
  
• Revenue has been on a downward trend, with a 6% decline for the full year of 2024, which indicates potential challenges in maintaining or growing revenue going forward.
  
• Intangible asset impairment charges and insurance-related charges have negatively impacted operating income and highlight potential future financial vulnerabilities that could affect earnings.
  
• The excess capacity, particularly in the intermodal segment, has incurred additional costs, and while there are plans to scale into this capacity, unresolved or drawn-out scaling could result in sustained pressure on net margins.
  
• The ongoing uncertainty surrounding market dynamics and freight recession challenges could delay improvements in margins and returns on capital, affecting long-term earnings potential.
  

Valuation

• The analysts have a consensus price target of $188.55 for J.B. Hunt Transport Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $202.0, and the most bearish reporting a price target of just $161.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.3 billion, earnings will come to $934.7 million, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 6.9%.
• Given the current share price of $172.66, the analyst's price target of $188.55 is 8.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.