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J.B. Hunt Transport Services (JBHT - Analyst Report), one of the largest U.S. truckload carriers, reported second quarter 2012 earnings of 67 cents per share, in line with the Zacks Consensus Estimate. Earnings per share increased 26.4% from 53 cents earned in the year-ago quarter on growth across most segments.

Total revenue increased 9% year over year to $1.26 billion, but missed the Zacks Consensus Estimate of $1.30 billion.

Operating income leaped 21% year over year to $137 million attributable to higher shipments in Intermodal (JBI) and Integrated Capacity Solutions (ICS) segments and lower fuel expenses in Dedicated Contract Services (DCS) and Truck (JBT) segments that compensated for higher transportation expenses.

Segment Results

Intermodal reported revenue of $762 million, up 13% year over year driven by a 13% increase in load count. The growth was aided by moderation in fuel cost and steady market demand. The average tractor count increased to 3,379 from 2,830 in the year-ago quarter. Operating income climbed 22% year over year to $93.4 million.           

Dedicated Contract Services revenues inched up 1% year over year to $267 million in the second quarter. The average truck count was 4,900 as against 4,761 in the year-ago quarter. Operating income shot up 21% year over year to $33.2 million on increased asset utilization and lower fuel cost partially offset by the increase in safety and maintenance costs as well as toll charges.

Truck revenues were down 3.0% year over year to $126 million in the second quarter despite a 4.7% rise in load count. The average tractor count fell to 2,461 from 2,513 in the year-ago quarter. Rates from shippers continued to improve and registered a year-over-year growth of 2.5%. The average length of haul declined 10.3%. Operating income upped 27% year over year to $8.8 million. Tailwinds like freight mix, higher seasonal spot pricing, gradual decline in fuel expenses and improvements in fuel efficiency contributed to the segments profit, compensating for higher driver wages, independent contractor costs, lower asset utilization as well as increased empty miles.

Integrated Capacity Solutions revenues grew 23.0% year over year to $109 million attributable to a 16% increase in load volume, mostly on contractual businesses that contributed over 60% of the shipments as opposed to 52% in the year-ago quarter. Operating income plummeted 25% year over year to $2.0 million given the decline in gross profit margin, which was suppressed by higher purchased transportation cost due to constraints in the truck supply market. On a year-over-year basis, the carrier base rose 13.0% and employee count grew 7%.

Liquidity

At the end of the second quarter, cash and cash equivalents increased to $5,887 million from $5,713 million in first quarter 2012 and $5,450 million at year-end 2011. Total debt amounted to of $679 million on June 30, 2012 compared to $702 million in first quarter 2012 and $749.0 million in fiscal 2011. However, total debt increased year over year from $664 million in June 30, 2011, resulting in higher interest expenses for the company. The company’s debt-to-equity ratio was 81.2% in the second quarter versus 123.2% during year-end 2011.

Capital expenditures were $171 million in the past six months compared to $211 million in the comparable year-ago period.

Share Repurchase

At the end of the second quarter, the company had a total share repurchase authorization of $503 million.

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. Further, effective cost control with moderating fuel expense and continued freight rate gains also remain encouraging.

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, significant growth in transportation cost on 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. For the short term, the company holds a Zacks Rank #3 Rank (Hold).

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