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On Sep 27, 2013 we maintain our Neutral recommendation on J.B. Hunt Transport Services Inc. (JBHT - Analyst Report) based on enhanced equipment velocity, accelerated fleet conversion and branching out in various locations. The transportation service provider holds a Zacks Rank #3 (Hold).

Why Kept Neutral?

Two of the company’s segments – Intermodal and Dedicated Contract Services (DCS) that contributed more than 80% to the total revenue in 2012 – are well poised for growth with strong market fundamentals. For the coming months, we expect double-digit intermodal volume growth as intermodal market fundamentals will be stronger than trucking.

J. B. Hunt expects the major chunk of volume growth to come from new contracts awarded due to the ongoing highway to intermodal conversion and a small part to be contributed by the existing customers.

DCS business continues to provide additional growth opportunities as it expands its footprint into a unique local delivery business, benefiting from the uptrend in e-commerce. J. B. Hunt currently operates in less than 2.0% of the current market, which provides ample growth opportunities for market penetration.

Additionally, the company is ramping up its fleet conversion, which will likely be beneficial going forward. Meanwhile, the company believes that selling intermodal services through ICS will aid double-digit revenue growth, leading to market share gains and enhanced profitability.  

Despite such positives, persistence of high competition within ICS remains detrimental to the company’s target of 6% operating margin expansion. Moreover, J.B. Hunt’s trucking segment is continuously being affected by the ongoing truck to rail conversion.

In an attempt to boost its performance levels, the company continues to upgrade equipment such as tractors, trailers, containers and trucks. Moreover, continued focus on investments can temper its margin. We also see cut-throat competition in the industry, fuel price volatility, staff retention and insurance liability as headwinds to J. B. Hunt.

Other Stocks to Consider

Other stocks within the sector that will likely perform impressively in the coming months are Patriot Transportation Holding, Inc. American Railcar Industries Inc. (ARII - Snapshot Report) and Swift Transportation Co. (SWFT - Snapshot Report). PATR currently carry a Zacks Rank #1 (Strong Buy) while ARII and SWFT carries a Zacks Rank #2 (Buy).

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