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J.B. Hunt Transport Services Inc. (JBHT - Analyst Report) remains well established on its growth trajectory given the underlying market trends that bode well for most of its segments, especially Intermodal and Dedicated Contract Services (DCS).

Despite a challenging economic outlook for the near term, we believe the changes in the freight transportation market, owing to truckload to intermodal conversion, will emerge as key growth drivers. These factors will not only drive solid pricing across all segments, but will also foster strong volume growth.

In the recently concluded second quarter, J.B. Hunt’s earnings of 67 cents per share were in line with the Zacks Consensus Estimate and improved from 53 cents in the year-ago quarter. The company’s revenue and operating income also grew 9% and 21%, respectively.

We believe J.B. Hunt is poised to benefit from its two largest segments, Intermodal and DCS, which contributed more than 80% of the company’s total revenue in the second quarter. We also believe that Intermodal is poised to gain market share, particularly in the East given its superior services, large fleet of equipment and cross selling opportunities with other business units like Integrated Capacity Solutions (ICS). Its favorable terms with other railroad service providers will help in winning new contracts. Though the Intermodal segment might face a more challenging business environment, we are optimistic about its growth as it continues to gain market share from the trucking segment.

The other segment, DCS, is evolving into a highly specialized fleet with a greater focus on final mile (i.e., residential) delivery, which is expected to achieve double-digit revenue growth in the long term. We believe that J.B.Hunt will continue to expand its DCS segment by developing broader portfolio offerings, which provide services to both large and small shippers. The company is focused on increasing truck productivity by concentrating on more profitable businesses and reducing the less profitable ones, which could result in slow growth for DCS.

Volatility in fuel prices is the major risk to J.B. Hunt. The company’s fuel surcharge revenue program enables it to recover the majority of higher fuel costs from customers. Most of these programs are adjusted automatically on a weekly basis depending on the cost of fuel. However, there can be timing differences between a change in the fuel cost and fuel surcharges billed to customers. In addition, the company incurs additional costs when fuel price increases cannot be fully recovered due to engines being idled during cold or warm weather and empty or out-of-route miles that cannot be billed to customers.

The truck industry is highly exposed to self-insured liability. We believe future liability insurance may exceed the historical level and remain detrimental to earnings. Additionally, the changing environment in the trucking industry due to highway-to-rail conversion also has an adverse impact on the company’s truck segment. Plus, J.B. Hunt remains exposed to competition from transportation and logistics companies like YRC Worldwide Inc. (YRCW - Snapshot Report) and Con-way Inc. (CNW - Snapshot Report).

Given the above pros and cons, we are currently maintaining our long-term Neutral recommendation on J.B. Hunt with a Zacks Rank #3 (Hold).

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