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J.B. Hunt Transport Services (JBHT - Analyst Report), one of the largest U.S. truckload carriers, reported third quarter 2012 earnings of 65 cents per share, missing the Zacks Consensus Estimate of 67 cents. However, earnings per share increased 14% from 57 cents earned in the year-ago quarter on growth across most segments.

Total revenue increased 10.6% year over year to $1.30 billion, at par with the Zacks Consensus Estimate.

Operating income grew 12.1% year over year to $133.1 million resulting in an operating margin of 10.3%, up 20 basis points (bps) year over year. The year-over-year growth is attributable to volume growth across Intermodal (JBI) and Integrated Capacity Solutions (ICS) segments that compensated for increased expenses in the Dedicated Contract Services (DCS) and Truck (JBT) segments.

Operating expenses increased 10.5% year over year to $1.16 billion, resulting in an operating ratio of 89.7%, down 20 bps year over year.

Segment Results

Intermodal reported revenue of $794 million, up 15% year over year, driven by a 15% increase in load count. The average tractor count increased to 3,522 from 3,057 in the year-ago quarter. Operating income climbed 25% year over year to $97.9 million.      

Dedicated Contract Services revenues inched up 1% year over year to $273 million in the third quarter. The average truck count was 5,153 as against 4,917 in the year-ago quarter. Operating income was down 14% year over year to $25.6 million due to cost incurred from new customers in the current quarter for the past four months. In addition, higher workers’ compensation, safety and health care costs added to the operating income decline.

Truck revenues were down 8% year over year to $117 million in the third quarter due to downsizing of fleet by 9%. Load count also decreased 2% year over year. The average tractor count fell to 2,406 from 2,569 in the year-ago quarter. Rates from shippers improved and registered a year-over-year growth of 2.6%. The average length of haul declined 9.1%.

Operating income was down 41% year over year to $4 million due to lower utilization of assets, increased empty miles along with increased employee healthcare cost, driver wages and costs relating to independent contractors.

Integrated Capacity Solutions revenues grew 30% year over year to $121 million attributable to a 38% increase in load count, mostly on contractual businesses that contributed over 64% of the shipments as opposed to 56% in the year-ago quarter.

Operating income increased 43% year over year to $5.5 million, driven by higher operating revenues and higher productivity on increased number of experienced workers. On a year-over-year basis, the carrier base rose 12.0% and employee count grew 16%.

Liquidity

At the end of the third quarter, cash and cash equivalents decreased to $5.7 billion from $7.7 billion at end of the third quarter of 2011. Total debt amounted to $645 million on September 30, 2012, compared to $768 million on September 30, 2011.  The company’s debt-to-equity ratio was 69.8% as of September 30, 2011, versus 123.2% as of December 31, 2011.

Capital expenditures were $279 million in the past nine months compared to $324 million in the comparable year-ago period.

Share Repurchase

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

Our Analysis

Despite falling trucking revenues on higher conversion of truck shipments to rail intermodal, J.B. Hunt managed to have a smooth sailing in the reported quarter based on strong business growth in intermodal and Integrated Capacity Solutions.

However, higher operating cost with increased compensation expenses and third party driver cost continue to weigh on revenue growth.  We believe significant growth in transportation cost stemming from tightening of capacity in the truck market amid truck load conversion to rail intermodal may affect the company’s performance ahead.

Further, 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)

We maintain 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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