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J.B. Hunt Transport Services (JBHT - Analyst Report) reported fourth quarter 2011 adjusted earnings of 59 cents per share, which surpassed the Zacks Consensus Estimate by a penny. Earnings per share increased 28.3% from 46 cents a year ago on strong growth across most segments. The current growth trend in freight rates arising from tighter truckload market; coupled with growing demand for intermodal and higher fuel surcharges continued to support the company’s earnings throughout 2011.

Adjusted earnings for the quarter exclude the negative impact of $3.9 million (or 2 cents per diluted share) related to executive retirees and charitable contributions.

Adjusted earnings for fiscal 2011 were $2.11, up 35.3% year over year.

Total revenue for the quarter climbed 18% year over year to $1.2 billion, in line with the Zacks Consensus Estimate. The year-over-year growth was aided by higher shipments across all segments. Revenues for the year grew 19% to $4.5 billion.

Quarterly operating income increased 26% year over year to $122 million, driven by higher volumes and cost improvements. Operating ratio improved 60 basis points (bps) to 89.9% year over year. Operating income for the full year was $444 million, up 28% on the back of 60 bps improvements in operating ratio to 90.2%.

Segment Results

Intermodal reported revenue of $729 million, up 24.0% year over year, driven by a 17% rise in load count. Higher fuel surcharges along with 4.6% higher freight rates and capacity constrains, particularly in the Southeast truck market, aided revenue growth in this segment. The average tractor count increased to 3,109 from 2,665 in the year-ago quarter. Operating income climbed 20% year over year to $83.9 million.

Dedicated Contract Services revenues grew 9% year over year to $260.0 million on higher truck count due to new contracts. The average truck count was 4,915 as against 4,573 in the year ago quarter. Operating income shot up 40.0% from the year-earlier quarter to $27.4 million on cost control, particularly reductions in insurance and claims costs, increased truck count and higher productivity arising from the transfer of assets into more profitable business units.

Truck revenues climbed 8.0% year over year to $128 million despite a 4.0% reduction in tractors. The average tractor count decreased to 2,597 from 2,707 in the year-ago quarter. Overall, the rates continued to improve and registered a 4.1% year-over-year growth in the quarter. The average length of haul increased 6.6%. Operating income surged 61% year over year to $7.1 million.

Integrated Capacity Solutions revenues grew 19.0% year over year to $99 million primarily on higher pricing in both contractual and transactional businesses as well as an increase in fuel surcharges. Volumes registered a modest growth of 4% in the quarter Operating income spiked 25% year over year to $4.1 million. On a year-over-year basis, the carrier base rose 12.5% and employee count grew 16.7%.

Liquidity

At the end of December 30, 2011, cash and cash equivalents of J.B. Hunt decreased to $5.4 million from $7.7 million in 2010. Total debt increased to $749 million from $654.0 million in the year-ago period.

Capital expenditure almost doubled to $446 million at the end of December 31, compared with $226 million in 2010 due to intermodal upgrades and purchase of equipments.

Share Repurchase

In fiscal 2011, J.B. Hunt repurchased 6 million shares for a total cost of $246 million. The company also initiated a new share repurchase program of $500 million in the fourth quarter. As of December 31, 2011, the company had $503 million remaining in its share repurchase authorization.

Our Analysis

We believe J.B. Hunt continues to gain market share across all segments, particularly in Intermodal, Dedicated Contract Services and Integrated Capacity Solutions that delivered record high results. We think J.B. Hunt will benefit from the resurgence in trade given its attractive asset-light models that generate the most attractive returns on invested capital in the industry. Freight rates are also expected to remain strong as a result of a tight capacity environment. Further, J.B. Hunt is involved in the continued contraction of the JBT business unit coupled with the growth in the ICS business unit, the expansion of the eastern intermodal network, and the development of new and existing customer base.

However, the company faces intense competition from other truckload carriers such as YRC Worldwide Inc. (YRCW - Snapshot Report), Old Dominion Freight Line Inc. (ODFL - Snapshot Report) and Conway Inc. (CNW - Snapshot Report) due to its low barriers to entry. Additionally, rapidly rising fuel costs and tightening of capacity in the Truck market amid truck load conversion to rail intermodal may affect the company’s performance ahead.

Consequently, we are maintaining our long-term Neutral recommendation on J.B. Hunt with a Zacks Rank #3 (Hold).

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