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Morningstar | J.B. Hunt's Intermodal and Truckload Pricing Gains Will Moderate in 2019, but We Still Expect Growth

At its core, J.B. Hunt is an intermodal marketing company--it contracts with the Class I railroads for the underlying line-haul movement of its owned containers. It was one of the first truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it forged an agreement with Norfolk Southern in the East. Hunt is now by far the largest intermodal provider, with an approximate 25% share of an $20 billion industry. The next-largest competitor is Hub Group, followed by XPO Logistics' intermodal unit and Schneider National's intermodal division. Intermodal makes up about 50% of Hunt's top line.Hunt isn't immune to macroeconomic downturns, but it's gradually reduced its exposure to the more capital-intensive asset-based truckload business, which represents 30% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. The firm has established a clear leadership position in intermodal shipping in terms of size and service capabilities while also investing heavily in asset-light highway brokerage. Low diesel fuel prices and depressed truckload pricing tempered intermodal's discount to trucking throughout 2016 and 2017. But truckload capacity tightened materially in 2018 on the back of robust demand trends and widespread electronic logging device adoption among small truckers (ELDs reduce productivity). Thus, shippers reignited their pursuit of multimodal options and truck-to-rail conversion activity improved, particularly in Eastern U.S. corridors, where several Class I railroads have boosted their network capabilities over the past decade. Truckload market capacity conditions will normalize throughout 2019, but favorable conversion trends should support 3%-4% midcycle industry container volume growth.Hunt's intermodal operations have allowed it to carve out a narrow economic moat via the network effect and scale economies. It would be quite difficult to replicate the company's massive container fleet and drayage network. Strong partnerships and favorable contract terms with Burlington Northern Santa Fe and Norfolk Southern also support its competitive strength.