J.B. Hunt: A Safe Haven Amid Freight Recession Fright?
Stock Analysis & Ideas

J.B. Hunt: A Safe Haven Amid Freight Recession Fright?

The predicament for trucks began a year-and-a-half ago when high freight demand started to be persistently met by low supply. The demand for transportation stocks was rock solid in 2021 and remained so through the beginning of this year. However, over this period, the fundamentals of the U.S.’s trucking business were quietly being shaken, ultimately leading the sector to its currently declining demand and falling prices. Now, the industry, and in particular trucking, is struggling just to find enough labor.

Come March 2022, tender rejections, which indicate the tightness of truck capacity, started to deteriorate considerably more than the typical seasonal trends. Additionally, the four-decade-high consumer price inflation of 8.5% hurt demand.

On April 8, Bank of America (BofA) (BAC), went on a downgrading spree citing the same reason—the downward trek in transportation demand and prices. On March 29, The Dow Jones Transportation Average, consisting of 20 large U.S. transportation companies including airlines to railroads, dove 13% from a recent high.

Recession on the Horizon?

Market surveys brought to light the situation of growing availability of capacity due to falling demand, spurring the series of downgrades of nine transportation stocks in BofA’s coverage. As if that was not enough, other research firms like J.P. Morgan trimmed their price targets on several transportation stocks as well.           

“A large number of respondents commented that pricing is declining rapidly, capacity is available, and these shifts could signal a downturn in the economy and lower demand,” said BofA, triggering a fear of freight recession, which can be detrimental to the economic balance as a whole. Thus began the flurry of sell-offs of transportation stocks as investors rushed to shake off the sector from their portfolios.

Rail volumes declined 3% year-over-year in March, further underscoring the dire situation of the transportation sector. The Association of American Railroads said that such trends indicate a level of uncertainty in the economy that needs to be addressed before it spirals out of control.

J.P. Morgan analyst Brian Ossenbeck said, “The risk of a freight recession is rising and likely inevitable for an industry where capacity additions always overshoot demand and rates are still near all-time highs.”

Weighing heavier on the transportation sector’s prospects is the fear of an overall recession, which is being stoked by the converging short-term and long-term bond yields, leading to an inversion of the yield curve.

For the unversed, an inversion of the yield curve (where short-term yields are higher than long-term yields) indicates that the market is relying on the belief that central banks will lift rates in the short-term but cut them as soon as short-term inflation-curbing goals are met, to avoid weakening of the economy. Historically, such a trend has mostly been followed by a recession.

One Stock that Might Weather the Storm

As we delved deeper, we noticed that there was one stock that was actually upgraded by BofA. BofA Securities analyst Ken Hoexter, who was behind the series of downgrades discussed earlier, actually raised the price target on J.B. Hunt Transport Services (NASDAQ: JBHT) to $195 from $173 while maintaining a Buy rating. Notably, Deutsche Bank analyst Amit Mehrotra, who upgraded J.B. Hunt to Buy from Hold on April 12, has similar sentiments on the company as Hoexter. Let us try to understand what makes the JBHT stock so attractive, even to skeptics.

J.B. Hunt provides a wide range of transportation services to multiple customer cohorts throughout the United States, Canada, and Mexico.

The company has been working hard on improving fleet productivity. Moreover, efforts to increase its average revenue-producing trucks are also expected to pay off. Even in dire straits, the company’s customer freight mix remains favorable, which may drive higher revenue per load.

Moreover, the company’s consistent efforts to enhance shareholder value even in adverse times are commendable. There were two dividend hikes in 2021, and in January this year, another raise was announced, taking its dividend to $0.40 cents per share from $0.30.

The company acknowledges that despite its intentions to pay quarterly dividends throughout the year, there is no surety that dividends will be paid in future. However, looking at the past seven years, J.B. Hunt has consistently paid dividends to shareholders on a quarterly basis.

Mehrotra was in high spirits about J.B. Hunt because he believes that the sell-off in the transport sector has bottomed-out. “It appears we are mostly through this period of significant near-term volatility (for now),” speculated Mehrotra. “The implication is that transportation group appears to now be fully pricing in a freight recession,” he added.

Concluding Thoughts

Whether we have only scratched the surface and more risks lie underneath from a broader market perspective, remains to be seen. Supply chain disruptions are still persistent and is expected to remain in our lives for at least the first half of this year, which will be a further concern for the transportation industry. Nonetheless, J.B. Hunt seems to be a safe bet as of now for investors who are looking to take their chance in the transportation sector.

Wall Street consensus has a cautiously optimistic stance on J.B. Hunt, with a Moderate Buy rating based on 10 Buys and six Holds. The average JBHT price target is $214.94 which indicates an almost 25% upside as of Wednesday’s market close.

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