Trucking An Unlikely Safe Haven

Tickers in this Article: JBHT, LSTR, KNX, HTLD, CNW

Many investors might logically assume that the trucking industry would be doing poorly in an environment of soaring oil and diesel prices, and a slowing economy, but J.B. Hunt Transport Services (Nasdaq:JBHT) recently reported second quarter diluted earnings per share of 39 cents and revenue of $977 million beating consensus estimates of 36 cents per diluted share and revenue of $ 925.4 million.

The company did note in its earnings press release that its results were impacted by soaring fuel costs and slowing truck volume, but J.B. Hunt has held up rather well despite all the things that seem to be working against it in the current environment. Looking at its share price performance, the stock has vastly outperformed the market, as measured by the S&P 500, on a relative basis year to date.

Soaring Fuel Costs
Fuel is a significant part of the costs of J.B. Hunt. In the second quarter of 2008, its fuel and fuel taxes expenses accounted for $157.6 million, or 16.1 % of revenues, up from $114 million or 13.4% of revenues in the second quarter of 2007.

While it is true that these costs were up sharply year-over-year, J.B. Hunt was able to pass on fuel surcharges to its customers to compensate. Fuel surcharges totaled $214.0 million in the second quarter of 2008, almost double the $133.3 million in the second quarter of 2007. While these fuel charges helped mitigate the impact of high oil prices, the company stated in its earnings press release that it will continue to be challenged by steep rises in fuel prices and "unrealistic fuel economy assumptions in most customer-specific fuel surcharge programs". Fortunately for J.B. Hunt and its shareholders, these restraints haven't yet resulted in catastrophic damage to the company's bottom line income.

Slowing Economy
The trucking segment of J.B. Hunt was noticeably impacted by both the slowing economy and the high fuel costs as revenues for that segment fell to $192 million, down 14% year over year. The segment managed to eke out an operating income of $3.4 million, down 79% year over year. If you exclude fuel surcharge revenue, then revenues were down an even steeper 23%, year over year. Loads were down 17%, and J.B. Hunt cut its tractor fleet by 22% in response to the decreased demand.

It was able to offset this weakness by growing intermodal business in response to customer demand for cheaper alternatives for shipping. Intermodal is defined as the transfer of products involving multiple modes of transportation, including truck, railroad and/or ocean carrier. Revenue in this segment was $496 million, and operating income was $66.2 million, up 28% and 22%, respectively year over year. Intermodal load count increased 17%. J.B. Hunt's ability to use its intermodal operating segment to counteract the weakness in its trucking segment really speaks to the strength and resilience of its overall business model.

Relative Performance
Perhaps because of the ability of trucking companies to partially pass through fuel price increases, and shift loads from trucking only to intermodal, the industry performance has held up rather well year to date.

J.B. Hunt and its four largest competitors as measured by market capitalization have outperformed the market as of late, as seen in the table below:

Company	YTD Share Price Return*
J.B. Hunt (Nasdaq:JBHT)	21%
Landstar System (Nasdaq:LSTR)	19%
Con-Way (NYSE:CNW)	7%
Knight Transportation (NYSE:KNX)	17%
Heartland Express (Nasdaq:HTLD)	8%
S&P 500	-19%
*Data as of market close July 15, 2008

Safe Haven
Although it seems counterintuitive, the transport industry has done very well. It is a heavy user of fuel, and it's leveraged to the economy, yet the trucking industry has been a safe haven so far during this bear market. Investors interested in profiting from this should closely follow the earnings of J.B. Hunt's key competitors as they come out, to get a sense of where the industry and its individual stocks may be headed from here.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator. Mr. Fox also publishes a paid investment newsletter. Please visit The Unknown Stock Report for more details.

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