The Secret Formula JB Hunt Transport Doesn’t Want You to Know!

Remember, JBHT is a publicly-held company, so its published financial statements accurately include the rich profits the Company is reaping from that “Secret Formula,” and they also briefly mention that JBHT has ~2,000 of its trucks and drivers now devoted to its execution. But JBHT’s discussion stops right there, discretely failing to mention that those same 2,000 trucks and drivers are now achieving what the rest of the trucking world considers to be impossible: Annual per-truck Revenue surpassing $750,000.00 and annual per-truck Operating Income exceeding $80,000.00! Frankly, those current JBHT per-truck achievements are far, far above the heights that would cause any experienced trucker to drool with financial envy! Yet JBHT refrains from displaying its rightful pride of accomplishment.

 

And just what is JBHT’s marvelous Secret Formula? Well, much like Albert Einstein, who wrote a very simple formula to summarize a very complex Theory of Relativity, JBHT wrote its simple formula in just one word: Intermodal. To solve the very complex challenges of making profits in the business of transporting freight, trucking company JBHT now pays railroads to do all its “heavy lifting,” i.e., moving the cargos on their cross-country journeys, while JBHT’s trucks do little more than (1st) transport the freight from an origination point to the closest rail yard, then (later) transport the freight in its final few miles from a destination rail yard to its intended recipient, and (lastly) haul JHBT’s handsome earned profits to the bank.

 

More specifically, during the first nine months of this year those 2,000 JBHT trucks and drivers devoted to Intermodal work generated $1.3 billion of revenue and $130 million of operating income. JBHT also whispered that by 9/30/09 its Intermodal group had completed 663,866 loads, but humbly declined to express the obvious, e.g., that JBHT reaped an average operating income of $195.00 per delivered load, with each of those 2,000 Intermodal trucks delivering, on average, 34 loads each month!  No Cajun chef worth his publicist’s admiration would ever hand you such a tasty dinner without shouting, “Talk about Good!” However, JBHT, of Lowell, AR, makes scant comment and just delivers gourmet-level dinner to its shareholders unobtrusively wrapped in an SEC-compliant Form 10-Q.

 

No traditional trucking company comes even close to matching the per-truck revenue and profit accomplishments of JBHT’s Intermodal unit, and everyone should seriously doubt that any traditional trucking company could begin to approach JBHT Intermodal’s stratospheric performance heights even if the traditional trucker’s every employee wore a mask and carried a gun. Look at these Best-of-Breed comparisons, all for the first nine months of this year: Heartland Express (NASDAQ: HTLD) generated only $345 million of revenue and $63 million operating income with its fleet of 2,800 trucks. Knight Transportation (NYSE: KNX), with 3,700 trucks, displayed trucking revenue of ~$459 million, and operating income of ~$60 million. And the 7,300 trucks run by Werner Enterprises (NASDAQ: WERN) produced revenue of just $1.0 billion and about $58.0 million in operating income; had WERN overall matched JHBT Intermodal’s accomplishments, WERN would have proudly reported an NOI number seven  times the size of its modest $58 million result.

 

At the other end of the trucking spectrum, consistently poor-performer Covenant Transportation Group (NASDAQ: CVTI) recently reported miserable financial results not unlike many other truckers, the lion’s share of which are suffering horribly in the depressed and nasty freight transportation marketplace that started downhill (first in the U.S. and soon spread worldwide) back in the Fall of 2006 and still continues. During this year’s first three quarters CVTI operated “in the red.” While its 3,100 trucks generated $385 million of total revenue, they produced a negative bottom line of $4.0 million. So CVTI lost ~$30.00 per truck per week since Jan. 1, 2009. To paraphrase Smith Barney’s old slogan: “They lose money the old fashioned way. They haul your freight for less than the actual costs.” Little wonder JBHT is not eager to broadcast its handsome niche to the many potential competitors!

 

North American commercial freight transportation, aka the trucking industry, is a highly fragmented business; the total revenues of its 30 largest players together now account for less than a 20% aggregate market share. Truckers, according to the leading trade organization, The American Trucking Associations, even today still transport nearly 70% of the freight needed in America, while currently losing much money in the process. Absent material barriers to entry, trucking has long been a relatively easy business to begin; but today many of its participants, those traditional truckers, would love to find a way out, if only to ease the pain levied upon them by their growing deficits, dismal demands for capacity, now again fast rising fuel prices, and sadly depressed used truck values.

 

JBHT’s metamorphosis from larva-ugly trucker to butterfly-beautiful Intermodal whiz hardly happened overnight. It began way back in 1988, when Michael R. Haverty, then employed by  the Santa Fe Railway Company (he’s now Chairman and CEO of Kansas City Southern, NYSE: KSU), convinced Johnnie Bryan Hunt, JBHT’s iconic founder, to let him load a JBHT trailer upon a Santa Fe flatcar, hooked behind a Santa Fe business car occupied by Haverty and Hunt, for a rail inspection trip out of Chicago. According to old written accounts of that event, the cigar-chomping and hard-boiled Hunt was so impressed with the Santa Fe flatcar’s ride quality that he immediately said to Haverty “Let’s do a deal.” So, soon thereafter, Hunt and Haverty stunned the transportation industry by announcing Santa Fe’s Intermodal partnership with JBHT, the first such collaboration between a railroad and a trucking firm, and 150 JHBT trailers and five Santa Fe railcars began their cooperative effort of regularly moving freight between Chicago and California.

 

Later, of course, the Atchison, Topeka and Santa Fe Railway merged with Burlington Northern to form Burlington Northern Santa Fe Corp. (NYSE: BNI), and the JBHT-BNI Intermodal alliance has continued to grow and prosper, reportedly moving more than 700,000 shipments across North America during 2008. While Malcolm McLean, an unlikely trucker from North Carolina, is correctly identified as the 1956 originator, pioneer, and leader of the worldwide multimodal container revolution, which altered the course and greatly accelerated the pace of international trade, this writer believes Mr. Hunt and Mr. Haverty deserve full credit for beginning a tectonic shift in the landscape of commercial freight transportation throughout North America. It was more than a decade ago that John G. Larkin CFA, then a trucking analyst at Alex, Brown & Sons and today the Managing Director of Stifel, Nicolaus & Company’s (NYSE: SF) renowned transportation and logistics research unit, applauded Mr. Hunt’s innovations by stating in a Forbes Magazine article that JBHT “may be ready to redefine the [trucking] industry by forging relationships with railroads.” Yet JBHT wants to keep it a secret; they sealed the doors to their kitchen so other truckers will not catch even a whiff of the delicious, well-seasoned prime beef they roast in those Lowell, Arkansas ovens!

 

Only one other major U.S. trucking company, privately-held Schneider National, Inc., based in Green Bay, WI, cooks with asset-based Intermodal recipes similar to JBHT’s. Using its own trucks and drivers for pickups and deliveries, but engaging BNI and other key railroads to transport its customers’ cross-country freight, Schneider’s Intermodal segment also serves up attractive profits for its owners and their families. Both JHBT and Schneider have, in the past,  focused their Intermodal services in states west of the Mississippi River; i.e., upon those long-mile surface transportation routes between West Coast sea ports, Mexican factories, and customers in middle America, routes served near exclusively by BNI, Union Pacific Corp. (NYSE: UNP) and KSU. More recently, however, JBHT and Schneider are paying close attention to building out their Intermodal services in the higher-populated eastern half of the U.S, there crafting similarly strong Intermodal network relationships with the Norfolk Southern (NYSE: NSC) and CSX Corp. (NYSE: CSX). The short take here is simple: where Intermodal was once deemed cost-efficient only as to freight transport assignments at or above 800 miles in length, the Intermodal teams at JBHT, Schneider, KSU, NSC and CSX are now cooperating to capture more freight needing much shorter lengths of haul. Beware, you regional truckers – Intermodal is your next major competitor!   

 

Chicago-based Hub Group, Inc. (NASDAQ: HUBG), and Pacer International, Inc.  (NASDAQ: PACR) of Concord, CA, have also long participated in the Intermodal space. They each own Intermodal containers; they each hold contracts with the major railroad; but neither HUBG nor PACR has enough company-owned trucks to provide their shipper-customers with the single-custody, start-to-finish functionalities offered by JBHT and Schneider. For large portions of their origin and destination drayage assignments, both HUBG and PACR must rely upon and pay independent contractors for that trucking work, thus considerably crimping their achievable profit margins.  Further, PACR does a lot of what it calls “wholesale” Intermodal business, meaning their customer is often itself an Intermodal intermediary, which translates to yet another middleman taking a piece of the pie before it reaches PACR’s dinner table.

 

The surrounding landscape might be best described as akin to a crazy quilt! Swift Transportation (SWIFT), privately held and based in Phoenix, AZ, the jumbo truck-freight broker CH Robinson Worldwide Inc. (NASDAQ: CHRW), Landstar System, Inc. (NASDAQ: LSTR), of Jacksonville, FL, and many other trucking and contract logistics management companies mentioned here and elsewhere have attempted to meaningfully enter the Intermodal area; none has yet struck the gold mine. While all along, SWIFT lacks serious Intermodal abilities, thus leaving many of its 15,000+ trucks and 4,000+ Intermodal containers sitting idle. PACR likewise has many low scores, not the least of which lies in its inability to well serve customers by picking up and delivering its own cargo-filled containers with its own trucks. SWIFT and PACR should get together; but they’ve yet to do so. LSTR is a hybrid; on one hand, it is more like a “clearing house” than a direct participant, as it makes most of its money by “raking” points off-the-top of business transacted by and between its independent agents and their customers. On the other hand, LSTR (unlike CHRW) does actually own a bunch of trailers and has actual contractual and near-exclusive agreements with some 8,000 or so real truck owners who generally operate those trucks under the direction of LSTR agents lacking Intermodal experience and business (Intermodal accounts for less than 4.0% of LSTR's revenue.). HTLD’s “burdens” have long included its parochial management style and its excessive liquidity positions (e.g., Is it a bank or is it a trucker?) combined with its absence of debt and apparent absence of desire to pursue anything other than plain old-fashioned trucking. Venerable CHRW has neither trucks nor trailers nor containers; it too has no corporate debt, is sitting on ~$350 million of cash, and displays a seeming desire to be “every shipper's answer to every shipping need,” despite that it succeeds by convincing middle-market independent truckers to work “on the cheap,” and further despite that its Intermodal presence is miniscule and perhaps sorely handicapped by a corporate reluctance to pursue large acquisitions. UNP is PACR’s largest rail service provider but is reckoned to “loathe” PACR while lusting for its position and certain customer relationships. BNI sleeps regularly with all the big money Intermodal truckers while still, during daylight hours, developing its own subsidiary, BNSF Logistics, to reach out and bypass those otherwise troublesome intermediaries. NSC competes directly with JBHT, Schneider, HUBG, and PACR via its subsidiary, Triple Crown Services; and CSX does likewise via its CSX Intermodal.

 

And so the questions develop: Who will wink first?  And how do we ordinary folks survive until and after those winks occur?

 

 

There are more than a few of us out here in the trucking world who have begun to believe that the past and still present “operating model” of traditional trucking companies is really quite broken, and cries out not just for repair, but rather for dramatic redesign. JBHT’s “Secret Formula” should be considered an important ingredient in that redesign and remedy. Just last week, for example, a fine United Kingdom-based trucking and Intermodal company, Eddie Stobart (LSE: STOB) announced its inauguration of weekly container train service from Spain to London, via the English Channel Tunnel, boasting that “one train can take over 30 truck loads.”  Stobart expects the new Intermodal service will soon replace more than 100 trucks each day that traffic the roadways and Tunnel separating Spain and the UK.

 

The facts are that here, and in many other countries around the world, Intermodal’s marriage of  truckers and railroaders is saving money for shippers, measurably reducing our consumption of diesel fuel, shrinking our carbon footprints, enhancing profits for the asset-based truck and rail participants, and creating many other benefits. Mr. Hunt and Mr. Haverty began scripting that thesis 21 years ago. It must no longer be kept a secret!

 

Here are a few suggestions for traditional truckers: You err if you think railroads are your enemies; they can be more than friends; they can be a trucker’s best buddy. Don’t be shy; start a dialog; call a railroad rep. and invite him or her out to lunch! Paraphrasing another old piece of advice: “If you keep your friends close and your enemies closer, you stand a much better chance of befriending those enemies.”

 

Bob Dylan must have been a trucker when he wrote “These Times They Are A-Changin!”

 

* * * * *

 

Author’s comments:

 

Given the inconsistencies of operating statistics presented to the public by the many trucking and railroad operators, certain of the numbers herein presented may be this writer’s well-derived estimates, but, even so, they are still rather reliable. As NPR’s Michael Feldman announces every week, “Anyone who says otherwise is itching for a fight!” Nevertheless, I invite your thoughts, comments, and debates.

 

Lastly, despite that this commentary contains observations as to this writer’s observed pros and cons regarding numerous organizations and their business ventures, those remarks should be taken as simply the author’s “stream of consciousness” thinking. Compliments herein extended are sincere; all challenges herein presented are absent even an inkling of malice. On this date of November 3, 2009, the author presently hold no positions, neither long nor short, as to the equity or debt offerings of any company herein mentioned.