A glimpse into the state of freight heading into bid season 2018. The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report. CFA is a registered trademark owned by the Chartered Financial Analyst Institute.

1. CFA Institute Research Challenge
Hosted by
The CFA Society of Memphis in the Local Mid-South Research Challenge

2. RECOMMENDATION
HOLD
Investment Summary
Trading and Fundamentals
Target Price ($) 129
Current Price (Jan 30) 121.76
52-Week High / Low ($) 126.49/83.35
Avg. Daily Vol. (000) 995
Shares Outstanding (M) 111
Market Cap. (Bn) 13.36
Enterprise Value (Bn) 14.43

3. Company Description
1961 Incorporated in Lowell, AR
1983 IPO raised $25 million ($1.62/sh.)
1989 Partnership with BNSF
2004 Arbitration with BNSF
2009 Dedicated Contract Services
Intermodal (JBI)
Largest 100% company-owned container drayage fleet in N. America
Priority loading/unloading at major rail terminals
Dedicated Contract Services (DCS)
Fleet creation, conversion, and augmentation
Design & implementation of value-driven supply chain solutions
On-site management
Integrated Capacity Solutions (ICS)
Non-asset based: dry van, flatbed, refrigerated, expedited, LTL
40- / 20-ft. box container services (domestic & international)
Truckload (JBT)
One of the largest capacity networks (N. America)
Instant tracking via the Internet, GPS trailer tracking
J.B. Hunt Transport Services, Inc. (“JBHT” or the “Company”) is a
North American transportation and logistics company composed
of four core business segments:

4. Intermodal (JBI) 2018 estimates
Loads: 8%
Revenue: $4.5Bn (+10.2%)
Operating Income: $510.15mn (+17%)
Revenue per load: 2%
88,610 TRAILERS
5,540 TRACTORS
JBI
ICS

5. Private Fleet Conversion & Final Mile Delivery
92 cross-dock facilities
Located within 150 miles of 98%
of the continental U.S. population
DCS
JBT
Dedicated (DCS) 2018 estimates
Revenue: $ 1,947.1mn (+13.3%)
Op. Income: $ 219.88mn (+23.0%)
Revenue/Tractor-week: $3,895 (+3.0%)

6. • Non-asset based brokerage services
• Fastest growing segment
• 44 sales branches
Brokerage (ICS) 2018 estimates
Revenue: $1,334mn (+30.2%)
Op. Income: $ 52.22mn (+112.3%)
Load Count: 1,231,114 (+24.0%)
Revenue/load: $ 1,083.60 (+5.0%)

7. Operates 2,032 tractors (owns 1,376)
ELD mandate constricts driver hours
Truckload (JBT) 2018 estimates
Revenue: $ 397.4mn (+5.0%)
Operating income: $ 25.55mn (+9.7%)
Revenue/Truck-week: $ 3,591.60 (+1.0%)

8. Demand for Drivers
SURPLUS Q1:2005 - Q3:2009
271,500 Driver Shortage Q4:2017

9. Source: Cass Information Systems, Inc.
2017
2014
2015
2016
2017 volumes display accelerated load growth
approaching 2014 peak-season levels
Cass Expenditures (1.00 = Jan 1990)
Cass Shipments (1.00 = Jan 1990)
20172014 2015 2016Legend:

10. Capacity Constraints

11. Source: ATA, Bloomberg Intelligence
ATA For-Hire Trucking Tonnage Index
ATA Intermodal Revenue/Load Index
ATA Intermodal
Loads Index
Increasing freight
demand, tightening
capacity.
Positive pricing
environment for
2018 bid season.
Steady increases in
trucking tonnage
since 2009.

12. Total Return (%) 1 Year 3 Years 5 Years 10 years
JBHT 23.5 16.2 13.6 16.7
S&P 500 21.9 11.4 15.8 8.5
S&P Transp. Index 23.5 7.5 18.7 12.8
Comparison of Total Index Returns (2008 – 2018)
JBHT
S&P 500 Transp. Index
S&P 500

13. 2018 Projections

14. Volume Pricing Revenue
JBI +8.0% +2.0% +10.2%
DCS +10.0% +3.0% +13.3%
ICS +24.0% +5.0% +30.2%
JBT +4.0% +1.0% +5.0%
2018 Revenue Assumptions

15. Consolidated revenue will grow by +13.5% to $8,159.4 million
Operating income will grow at +21.9% to $807.7 million
Effective tax rate has declined to 25% following legislation ($309 million break)
Diluted EPS expected to reach $5.21 (2017 EPS $3.74)
Expectations for 2018

16. Capital Allocation
JBHT maintains debt around 1x
EBITDA ($1,085.6 million)
Insiders hold 4% of shares
outstanding (Garrison)
Dividend per share is modeled to
grow by $0.04 annually
Generates substantial FCF

17. Model
Price ($)
Weighting Weighted
Value ($)
DCF 129 35% 45
EV/EBITDA 132 35% 46
P/E 127 30% 38
Target Price 129
Valuation Summary

18. WACC
E(Market Return) 7.50%
Risk-free rate 2.65%
Beta 1.10
Cost of Equity 8.0%
Cost of Debt 3.0%
WACC
7.6%

19. Discounted Cash Flow Model
WACC 7.6%
Terminal Growth Rate 3%
Equity Value (MM) $14,363
Shares Outstanding 110.7 Million
Target Price
$129

20. Price-earnings multiples
2018E estimates for JBHT and Comps
Peer group P/E (est.) 19.6x
JBHT P/E (Premium) 24.5x (24.5%)
2018E EPS $5.21
Target Price
$127

21. EV-earnings multiples
2018E for JBHT and Peer Group
JBHT EV/EBITDA (+1.4%)
Comp EV/EBITDA 12.8x
EBITDA $ 1,210M
EV $15,698M Target Price
$132

22. Impact
Probability
Arbitration
Insurance claims
Adverse weather conditions
Economic
contraction
Investment Risks
Economic contractions. Transportation and
logistics is a cyclical business that is heavily
dependent on the overall level of economic
activity.
Interference with or termination of relationships
with certain railway providers.
Loss of contractual revenues. JBHT derives a
significant portion of revenues from a few major
customers.
Insurance claims and accident expenses.
Transportation companies typically self-insure a
substantial portion of property and casualty risks.
Adverse weather conditions.
Difficulties related to driver recruitment and
retention.

23. Model
Price ($)
Weighting Weighted
Value ($)
DCF 129 35% 45
EV/EBITDA 132 35% 46
P/E 127 30% 38
Target Price 129
Valuation Summary

24. Appendix
Revenue (Incl. FSC): 2018E 2019E 2020E 2021E 2022E
Intermodal 4,499.4$ 4,984.0$ 5,283.0$ 5,600.0$ 5,936.0$
Dedicated 1,947.1$ 2,143.6$ 2,272.2$ 2,408.5$ 2,553.1$
Integrated Capacity Solutions 1,334.0$ 1,564.8$ 1,658.7$ 1,758.2$ 1,863.7$
Truck 397.4$ 366.2$ 388.2$ 411.5$ 436.2$
Subtotal 8,178.0$ 9,058.6$ 9,602.1$ 10,178.2$ 10,788.9$
Intersegment Eliminations (18.6)$ (20.5)$ (21.8)$ (23.1)$ (24.5)$
Consolidated Revenue 8,159.4$ 9,038.0$ 9,580.3$ 10,155.1$ 10,764.4$
Fuel Surcharge 822.6$ 822.6$ 822.6$ 822.6$ 822.6$
Operating Revenue x FSC 7,336.8$ 8,215.4$ 8,757.7$ 9,332.5$ 9,941.8$

25. Appendix
Operating Income: 2018E 2019E 2020E 2021E 2022E
Intermodal 4,499.4$ 4,984.0$ 5,283.0$ 5,600.0$ 5,936.0$
Dedicated 1,947.1$ 2,143.6$ 2,272.2$ 2,408.5$ 2,553.1$
Integrated Capacity Solutions 1,334.0$ 1,564.8$ 1,658.7$ 1,758.2$ 1,863.7$
Truck 397.4$ 366.2$ 388.2$ 411.5$ 436.2$
Other (0.1)$ (0.1)$ (0.1)$ (0.1)$ (0.1)$
Operating Income 8,177.9$ 9,058.5$ 9,602.0$ 10,178.1$ 10,788.8$
Net Interest Expense 32.0$ 32.0$ 32.0$ 32.0$ 32.0$
Pretax income 8,145.9$ 9,026.5$ 9,570.0$ 10,146.1$ 10,756.8$
Income Taxes 2,036.5$ 2,256.6$ 2,392.5$ 2,536.5$ 2,689.2$
Effective Tax Rate 0.3$ 0.3$ 0.3$ 0.3$ 0.3$
Net Income 6,109.4$ 6,769.9$ 7,177.5$ 7,609.6$ 8,067.6$

26. Multiples for selected peer group

27. THREAT OF NEW
ENTRANTS
Drayage unit cost inflation
impacts up to one-third of
JBHT’s cost stack
Low barriers to entry made
higher by ELD mandate
BARGAINING
POWER OF
CUSTOMERS
THREAT OF
SUBSTITUTES
BARGAINING POWER
OF SUPPLIERS
Revenue agreements with
railway providers hedge
driver wage inflation Beneficial cargo owners (BCOs) account
for one-third of JBHT revenues
PORTER ANALYSIS
INDUSTRY RIVALRY
Capacity constraints and driver shortages intensify ahead
of an expected freight demand up-cycle
Competitive
Positioning

32. DCS
JBT

34. JBI
DCS
JBT

38. AAR. Rail Intermodal Keeps America Moving (April 2017)

39. The Economic Impact of America’s Freight Railroads (June 2017)

40. AAR. Rail Intermodal Keeps America Moving (April 2017)

41. AAR. Rail Intermodal Keeps America Moving (April 2017)

42. AAR. Freight Railroads & International Trade (March 2017): 5

43. AAR. Freight Railroads & International Trade (March 2017): 5

44. AAR. The Environmental Benefits of Moving Freight by Rail (June 2017)

45. Source: AAR. The Environmental Benefits of Moving Freight by Rail (June 2017)

46. Source: AAR. The Environmental Benefits of Moving Freight by Rail (June 2017)

47. Source: AAR. The Environmental Benefits of Moving Freight by Rail (June 2017)

48. Image: U.S. DOT. Automated Driving Systems 2.0: A Vision for Safety (September 12 2017)
Parsing the hype
in automated
driving systems

49. J.B. Hunt Transport, Inc. 660 Minutes: How Improving Driver Efficiency Increases Capacity (2015): 3.

50. J.B. Hunt Transport, Inc. 660 Minutes: How Improving Driver Efficiency Increases Capacity (2015): 2-

51. J.B. Hunt Transport, Inc. 660 Minutes: How Improving Driver Efficiency Increases Capacity (2015): 8.

52. J.B. Hunt Transport, Inc. 660 Minutes: How Improving Driver Efficiency Increases Capacity (2015): 8.

53. Hours of Service Constraints (11-14-11 Rule)

54. Electronic Logging Devices (ELD)
[KeepTruckin's logbook app]

55. Electronic Logging Devices (ELD)
J.B. Hunt Transport, Inc.
Why Shippers Are Choosing Intermodal (Aug 2016)
J.B. Hunt Transport, Inc.
Electronic Logging Device Impact (Feb 2016)

56. Source: Victoria Transport Policy Institute (VTPI). Autonomous Vehicle Implementation Predictions: Implications for Transport
Planning (8 September 2017): 12-13.

57. Source: Victoria Transport Policy Institute (VTPI). Autonomous Vehicle Implementation Predictions: Implications for Transport
Planning (8 September 2017): 14.

58. Source: Virginia Tech Transportation Institute (VTTI) Automated Vehicle Crash Rate Comparison Using Naturalistic Data

59. J.B. Hunt Transport, Inc. Dwell: How Intermodal Terminal Congestion Impacts Capacity and Service. (2015):