J.B. Hunt, P.A.M. stocks rise to 52-week highs

Share prices of two Northwest Arkansas-based transportation companies have reached record highs amid strong freight demand, tight capacity and a labor shortage.

On Sept. 23, shares of Tontitown-based carrier P.A.M. Transportation Services Inc. (NASDAQ: PTSI) rose to a 52-week high of $47.51. Lowell-based carrier J.B. Hunt Transport Services Inc. (NASDAQ: JBHT) shares traded at a 52-week high of $184.38 on Aug. 30. This year, the carriers’ stock prices have risen 92% and 34%, respectively.

In a recent industry update, analysts Jack Atkins and Justin Long and associate George Sellers, all of Little Rock-based Stephens Inc., said demand remains strong in the transportation sector. That looks to continue into 2022. The analysts said they expect pricing to continue to exceed expectations in the near- and medium-term along with capacity constraints.

The industry faces challenges, however, with cost and operations, the analysts noted. The most significant issues are labor challenges in finding truck drivers, rail employees and warehouse workers, and network congestion, including a backlog of ships at the West Coast ports and component shortages.

“As a result, we think this is starting to create more bifurcation among the different stocks in the transportation sector as investors look for the companies that can benefit from cyclical/secular tailwinds while mitigating some of the cost-related challenges,” the analysts said. “Investors are starting to come around to the view that the current freight cycle is not like what the market experienced in 2014/2015 and 2017/2018, a 12-month period of rate improvement followed by a deterioration in rates as capacity expanded. Instead, a shortage of labor and equipment, combined with low inventories and a recovering industrial economy should mean that the current strong freight market fundamentals could last well into 2022.”

The analysts noted that carriers likely will have the upper hand in pricing at least through spring 2022, and shippers are preparing for rates to rise in the high-single or low-double digits early next year. On average, the analysts expect truckload contract rates to increase in the mid-single digits in 2022.

According to the analysts, the labor shortage extends beyond finding qualified drivers and includes back-office and management support staff. Also, shippers lack the labor to unload equipment being delivered to their warehouses, causing truck, trailer and container turn times to fall, adding to the capacity crunch.

“There is some hope that as enhanced unemployment benefits begin to lapse, this will improve modestly, but no one is counting on it,” the analysts explained. “Interestingly, pay doesn’t seem to be the only incentive to attracting talent. We heard anecdotes that even meaningful bonuses (an incremental $10,000-$15,000 per year) are not enough to attract enough drivers to haul freight in some peak pop-up fleets.”

The analysts attributed lower rail volumes to supply chain issues, driven by auto component shortages and intermodal capacity constraints. However, demand for rail transportation remains strong, and compared to last year, pricing is up, offsetting some of the volume shortfalls. Even so, rail pricing is about 20% to 25% below truck pricing in the United States, and this should allow for continued pricing strength, especially if service improves.

Yet, rail service continues to be significantly impacted by labor shortages, particularly in the intermodal segment. According to the analysts, the shortage is a challenge in the drayage network and at customer facilities and warehouses.

“Looking ahead, we feel there is very limited visibility on when service in the rail network will fully recover as it does not seem like an easy fix,” the analysts added. “The rails are hesitant to throw a significant amount of equipment at the problem risking more congestion, so the solution seems to primarily be a function of adding labor and/or moderation in the volatility throughout the network. And in the near-term, it’s hard for us to get comfort in either of these items materializing given the broad-based labor challenges and an outlook for demand to remain very strong into peak season.”

For J.B. Hunt, the analysts have a favorable long-term view and believe the “cyclical dynamics are creating an opportunity for strong (earnings per share) growth into 2022.” The near-term outlook of the stock looks to be more challenging, with volumes likely to decline in the third quarter amid capacity constraints, the rail service issues and strong performance in the stock so far this year. While the analysts maintain an overweight, or buy, rating on the stock, “we would be more actionable buying on any pullbacks in the months ahead.”