Profiting from a Transport Turnaround

08/05/2009 11:00 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Benjamin Shepherd, associate editor of Personal Finance, finds a niche trucker he thinks will benefit from the improved fortunes of the transportation sector.

The Dow Jones Transportation Average is an excellent gauge of the country’s economic health.  The index tracks the ebb and flow of both input materials and finished goods throughout the country. That puts the transport sector on the leading edge of downturns and recoveries.

Despite rallying more than 70% off its March low, the Dow Transports still paint a grim picture of the US economy. But it also suggests investors believe we’re nearing the turning point in the cycle.

Though still far from healthy, consumer sentiment is gradually improving after bouncing off its historic February low. Inventories at all rungs of the supply chain are shrinking, and factory orders posted a third consecutive increase in June, signaling that demand is stabilizing.

If you’re focused on owning quality companies rather than speculating on the quickest bounce, this is an opportunity to profit on a transport rebound.

Trucking has always been a cutthroat business defined by a constant battle for market share. Recessions only make it worse. Over the past two years, [many] small outfits have gone under, and at least one major player is teetering on the brink of insolvency. Everyone else has slashed fleet sizes and fought price wars.

JB Hunt Transport Services (Nasdaq: JBHT) hasn’t been immune to those phenomena. It has, however, enjoyed some insulation because of its strong intermodal shipping business. (Intermodal shipping involves the use of containers to move freight from one mode of transportation to another without having to repack it—Editor.) Rising intermodal volumes helped offset an overall decline in business.

JB Hunt’s revenue declined 18% in the first quarter, but this drop-off wasn’t nearly as dramatic as those seen at many competitors, which experienced declines of as much as 25%. JB Hunt was one of the first trucking outfits to enter intermodal shipping, establishing major relationships with Burlington Northern Santa Fe(NYSE: BNI) in the west and Norfolk Southern (NYSE: NSC) in the east.

These relationships are by no means exclusive, and there’s plenty of competition. But JB Hunt’s tenure and expertise in intermodal shipping makes it one of the lowest-cost shippers in the market, a distinct competitive advantage.

It should also receive a boost from the recent decision by Hub Group(Nasdaq: HUBG), a major freight transportation management company, to switch to Union Pacific (NYSE: UNP) from BNI as its primary intermodal carrier. JB Hunt currently relies on Burlington Northern as its primary shipper, so the move by Hub removes one of Hunt’s major competitors.

Another factor in JB Hunt’s favor is its diversified offerings. It provides services ranging from dedicated contract work to brokerage services; earnings are less dependent on economically sensitive hauling in bad times and more diversified in good.

A solid long-term investment and a play on economic recovery, JBHT is a Buy below $33. (It closed above $29 Tuesday—Editor.)

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