?Dedication? Helps Hunt Boost Profits

J.B. Hunt Transport Services Inc. has an answer for the trucking industry’s negative environment — get dedicated.

The Lowell truckload carrier is aggressively shifting capacity from its Over-the-Road, or traditional spot-market segment, to its Dedicated Contract Services division. The plan is to deploy assets and capital where higher margins can improve profitability. For Hunt, that means DCS, which specializes in the design, development and execution of supply chain solutions for other firms. So far, it’s working.

Although high fuel costs, soft freight demand and pricey insurance pressures weakened the sector during the first quarter, Hunt enjoyed a stock resurgence that on Jan. 19 saw a two-year high at $20.31. As of mid-May, Hunt’s stock was averaging $17-18, or about a $4 increase over the last two months.

Jerry Walton, Hunt’s chief financial officer, said the shift started gradually in 1998. Since then, DCS has recorded a compounded annual growth rate of 50 percent.

But last year, the dedicated segment’s revenue leapt 49 percent to $478.6 million, up from $320.2 million in 1999.

“DCS has always been profitable,” Walton said. “Up until now it has not been a big growth engine for us. But we have redesigned the product with general truckload freight in mind, and the demand for that business from shippers is there.

“There’s not a secret why we’re doing this. We’re doing it because we can make more money.”

Hunt’s revenue for the first quarter was $495 million. DCS did 26 percent of that total ($127.8 million), OTR was 41 percent ($204.7 million) and Hunt’s third main segment, its Intermodal division, brought in 33 percent ($165.9 million).

But DCS made $4.3 million or 10 percent more than the $3.9 million it netted in 2000’s comparable quarter. Meanwhile, OTR — which is most affected by economic downturns— lost $3.2 million over the same span compared to the $156,000 it lost a year ago.

The excessive slippage was blamed on what analysts have called the weakest quarter for freight demand in a decade.

Dan Moore, the lead transportation and logistics analyst for the Little Rock securities firm Stephens Inc., said “near term” Hunt’s management is focused on improving OTR’s profitability. For the past nine to 12 months, he said, the company has scoured its cost structure and determined some pricing changes are needed. Mostly, that means rate hikes.

Hunt is also leveraging its owner operator base and its ability to grow that base to improve OTC margins. Additional owner operators, drivers who get a guaranteed volume of Hunt’s freight but supply their own trucks, reduce Hunt’s exposure to operating costs.

“But looking long-term, DCS is the story,” Moore said. His company rates Hunt’s stock a “buy,” and estimates its 2001 full year earnings per share will be 90 cents.

In addition to being more profitable, dedicated routes are preferred by drivers because of their more regular time schedules. The move in that direction is one of a series of steps Hunt has taken to fight what remains its industry’s No. 1 problem — driver turnover.

Everyday Low Shipping

DCS scored a coup April 20, 2000, when it won Wal-Mart Stores Inc.’s coveted centerpoint transportation contract. The $100 million deal made Hunt the retailer’s full truckload shipper from 14 distribution centers nationwide. The business was consolidated from 50 other carriers, and despite only comprising 10 percent of Wal-Mart’s carriage, it was a big score in the industry.

Hunt scrambled and dedicated 360 trucks and more than 1,000 trailers to get service up and running in one month.

“Few if any competitors could achieve that type of upstart,” Moore said. “There are few companies in the industry that can even offer that kind of integrated solution period, much less do it in 30 days. Frankly, J.B. Hunt is one of a handful that can back something like that up.”

Target, Proctor & Gamble, Anheuser-Busch, The Home Depot and Office Depot have also seen the light. They, along with Wal-Mart, comprise Hunt’s top-tier client base for DCS.

“In the future,” Walton said, “people who still have private fleets will wake up to the fact that J.B. Hunt can move their freight cheaper with dedicated trucks than they can do it with their own. Odds are real good that [dedicated contracts] will continue to grow.”

The way Hunt does it is by integrating a sophisticated truck and intermodal network and some state-of-the-art custom technology to reinvent a company’s supply chain management. By using both asset-based and non asset-based services, Moore said Hunt can reengineer supply chains to optimize a customer’s network. Supplies move faster, are on time more often and holding costs are mitigated.

“For companies looking for the most cost-effective shipping alternatives,” Moore said, “I would argue that JBHT’s intermodal division provides service and portfolio offerings that go unmatched.”