Episode 129: Joseph Sinay’s Financial Analysis of J.B. Hunt

June 23 , 2021  |  By Matt Waller

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In this episode of Be EPIC, Matt is joined by Joseph Sinay to discuss his research on J.B. Hunt Transport Services and his thoughts on Matt’s book, “Purple on the Inside: How J.B. Hunt Transport Set Itself Apart in a Field Full of Brown Cows”.

Episode Transcript


0:00:08.3 Matt Waller: Hi, I'm Matt Waller, Dean of the Sam M. Walton College of Business. Welcome to Be EPIC, the podcast where we explore excellence, professionalism, innovation and collegiality, and what those values mean in business, education and your life today.

0:00:28.3 Matt Waller: I have with me today, Joseph Sinay. He just finished his MBA program at Columbia Business School. He's a CFA and a CPA, and he is getting ready to go to work in Hong Kong in the finance industry. But he contacted me a while back... He had read the book Purple on the Inside, that Kirk Thompson, the chairman of the board of JB Hunt and I wrote. And he was using it in his report for one of his classes on financial analysis in the MBA program. And he later shared the analysis with me and I was extremely impressed with what he had created. And I thought it would be adventurous to a lot of our listeners. So, Joseph, thank you for agreeing to do this, I appreciate it.

0:01:24.5 Joseph Sinay: Thank you. Glad to be here. Your book was obviously a great help in the research process. I thought speaking to you and reading the book helped shape a lot of the direction early on, and it really highlighted a lot of the things that I wouldn't have realized otherwise.

0:01:40.5 Matt Waller: Well, you did a very nice job. You organized your report into an overview, and what you call act one, act two, act three and conclusion, which I thought that was a nice way to organize it. But I noticed also you carefully studied the history of JB Hunt. You looked really carefully at the US land-based freight industry, and you made a nice map that shows who the players are. You also looked at JB Hunt's business and you analyzed it from a financial perspective, the intermodal division, the dedicated and integrated final mile and truckload segments of JB Hunt.

0:02:24.9 Matt Waller: And you, again, you looked at the financials of the industry as a whole. I also noticed that you picked up early on the concept that we don't think of companies as having economies of scale or scope, but you mentioned in your report something about how JB Hunt has developed economies of scope over time. Would you mind talking about that a little bit?

0:02:51.2 Joseph Sinay: Yeah. So the way I understood JB Hunt's history is, you really gotta go back to where it started. And where it really kicked off is in the 1980s, really, where there was a deregulization of the 1980 Motor Carrier Act. And what was really going on was the trucks were essentially going from monopolies per route into a free-for-all competition. And what that meant was any trucker could come in and try to compete with the established companies. And JB Hunt just really did that in a way that was completely different from how everybody else was doing it.

0:03:33.3 Joseph Sinay: They were using a standardized fleet, they were employing the drivers, they were using a really smart way of pricing it. They were thinking of the whole system, the whole network, the routes to and from origin and destination. Whereas, the other trucking companies at the time would normally just look at it on a route profitability basis.

0:03:55.7 Joseph Sinay: So they were really ahead of the game in the 1980s. But you would see as they rose from one of the smaller players into eventually the largest player in truck load. By the time, the 1990s hit, they were already the largest player. And you could clearly see then that the things that they did were really unique, but competitors at this time were looking at this and they were looking at it and they were trying to study it and they were trying to get to it. And you would realize that at some point competitors would eventually catch up to all of this. They would be able to do things like slip seating. They would be able to do things on the pricing. They would be able to standardize their trucks.

0:04:33.8 Joseph Sinay: And so you would see that this is characterized as a highly competitive industry. They would have some advantages now, but later on their competitors would be able to catch up. And that's what I would call generally, the act one of JB Hunt. And then we go into act two, which is, they build this intermodal business, which is the combination of the freight part of it, the trucking freight, and the rail part of it. What makes this so unique is that at the time that they were doing it, it was such a revolutionary idea for a trucking company to partner with a rail company.

0:05:09.8 Joseph Sinay: If you were a trucking company at the time, there would be very few of you who would have the resources to actually invest in an intermodal business, because you would have to change the way the operations worked at the rail yard, you would have to change your containers, you would have to change your trucks, you would have to make a lot of changes; some capital investments that very few companies at the time could do. On top of that requirement, you also needed to be willing to make those investments, and I think that's what separated JB Hunt from the rest of the pack.

0:05:41.2 Joseph Sinay: After they committed essentially a decade or more into that intermodal business, they've got the rail yard set up, they've got the containers, they've got the trucks, and by this time, if you were looking at the intermodal business, let's say in 2005, 2010, 2015, it's gonna look very intimidating to come into this industry. Because if you're gonna put in capacity, JB Hunt's always gonna be there. They've got more capacity, they've got density, they've got network optimization, and so how are you gonna be able to enter this business and build it unless you were willing to lose a lot of money over a quite a period of time.

0:06:18.1 Joseph Sinay: And so that's one business where you wouldn't normally see scale, where you wouldn't normally see competitive advantage, but now through sheer force, through strategic planning, through just pure execution, JB Hunt has built a business with a competitive advantage and economies of scale in the intermodal business.

0:06:39.5 Joseph Sinay: The other business which I think they've also built some competitive advantage in, is the DCS business, which is their dedicated business, which you would think of as an outsourced fleet. The way this business was born was they had a real ability to deliver on customer service, on customer experience, that very few players at the time during the 1980s onwards, were able to do. And because they had such an ability to provide good customer service, they were able to take that, plus their ability to manage fleets and just offer that as a holistic service to their customers. So if you were any large corporation and you thought that they could handle your trucks better, you would let them do it.

0:07:22.6 Joseph Sinay: But now, as you move forward in time, what JB Hunt has done is they kept pressing on the types of things that they were doing. They were essentially looking for specialized freight. They were looking for difficult freight, they were looking for small size freight. If you go around and ask what kind of freight provider... Outsourced freight provider could handle account sizes of five to seven trucks, very, very few would be able to handle that small of an account. And they would just say, "Maybe JB Hunt could do it, but we're certainly looking for larger accounts." Because they're the ones who are going out there and doing the more difficult stuff. So I think those are two great examples of how you build some scale, some differentiation in an otherwise very competitive freight market.

0:08:07.0 Matt Waller: Yeah, that was one of the things I liked about your report that you didn't just analyze the financials, you were very careful to understand the context and learn about transportation. Now, let me ask you this, did you know very much about transportation before this project?

0:08:25.9 Joseph Sinay: I knew very little about transportation before this project. I used to cover banking, which is a completely different business from this, right? You would have deposits, you would have loans. And some of those things don't really move around. And so when I was assigned this project... I have a partner in this project, Tab Williams, who worked on this with me. And neither of us had experience looking at trucking, looking at freight, looking at transport. And so it was just a big adventure for us. And it was a great learning experience because if you were gonna study this industry, I don't think there would be a better case example than JB Hunt.

0:09:02.1 Joseph Sinay: You just learn a lot. Not just in transportation, but just running a business and looking at a great company with great management. Because during the 1980s towards the early 2000s, it was very clear that the trucking market, the traditional freight market has become very, very competitive. Freight rates were going down, driver retention was getting tougher and tougher, and so you were being squeezed on both ends. You had to pay drivers more, but your shippers weren't paying you more. And so your margins were essentially falling.

0:09:31.7 Joseph Sinay: JB Hunt, under Kirk Thompson, actually decided to reduce their investments in the fleet for the traditional freight business. That is very difficult. They're the largest player in this business. It's the largest piece of their business. And so for you to go out there and tell the Wall Street, tell your investors that you're gonna shrink the biggest part of your business, no one ever likes hearing that. But you were looking at the numbers... Kirk was looking at the numbers, and the whole company realized that the more you grow this piece that's losing you money, the worse it's gonna be for everyone involved.

0:10:08.8 Joseph Sinay: And I think that's a testament to the kind of thinking that the company has. So it's not just great operationally building into things for the long term, it's also despite the short-term hit, despite the bad optics to Wall Street and the media and all of that, they're doing the right things for the company, for their employees, for their shareholders. And it's not like they just fired everyone from the trucking, right? They just repositioned a lot of the trucks, they repositioned a lot of the drivers from the long haul freight, which was becoming unprofitable towards the shorter haul freight, like intermodal, like DCS. So they were still very much a people-centric organization through all of this.

0:10:48.2 Matt Waller: And you noted in your report just the entrepreneurial culture that JB Hunt as a company has, and really, there's a couple of things that you really pointed out. You were mentioning that Kirk was really looking at the numbers. So it's almost like a nice combination of a financially-oriented company that is very entrepreneurial. And one of the quotes you used from JB Hunt in your report was, he said, "Never let anyone put a fence around your dreams."

0:11:19.3 Matt Waller: He was willing to take risks and kind of go where no one had gone before, which is what a good entrepreneur does. But there were so many things they tried over the years that didn't work and they got out of like tug boats and hazardous commodities and flat bed and many, many others. But the ones that worked, have worked quite well. You also noted that JB Hunt has only had four CEOs over a 60-year period. What made you decide to point that out about the history?

0:11:55.8 Joseph Sinay: I think it was a really good piece of information to know, because having four CEOs over 60 years tells you that there's a very strong corporate culture that works. If you have a high turnover rate for your CEO, it means that there's something that you wanna change about the culture, something fundamentally different. You wanna move the company in a completely different direction. And JB Hunt is so interesting because they've got such a strong bench. They've got such a strong leadership team that they can tap the next person to take on the leadership role, that person will tap the next person.

0:12:31.8 Joseph Sinay: And they all grew up within this system. They all know how the company works, they know the people that work in it, and more importantly, that hasn't stopped them at all from investing in these new things. They've maintained their leadership, they've made the right investments in technology, they're pursuing new businesses. You would usually think that if the company doesn't change its people they sort of fall blind to a lot of the trends, to a lot of the change. They fail to adapt, but that's not what's happening with JB Hunt.

0:13:02.4 Joseph Sinay: In fact, their ability to have such a strong culture, to have a strong leadership culture allows them to capitalize on these new trends because they're able to make the 10-year investment, the 15-year investment that will help them succeed in the future. Somebody else coming into this company with a more shorter term view might not be to make the same investments. And I think it's an interesting example of you don't need external management to drive a big change in the organization. And at the same time, if you have something that's really working, you just keep at it. Right?

0:13:33.7 Matt Waller: Yeah, that's a really good point. And if you look at some of the decisions that John Roberts has made, he started... I don't remember the exact date, but it was around 2011. And it wasn't long after that that they launched JB Hunt 360 and then committed $500 million to technology investments. And you noted that in the report. What's your perspective... Around that same time, the business was doing quite well too. But it seemed to me, and I'd like to know what you think, that Wall Street really liked the decision to make that kind of an investment. What are your thoughts about that?

0:14:20.0 Joseph Sinay: Well, this Wall Street thing is really interesting because up until the financial crisis in 2008, the stock price of JB Hunt just really traded around its earnings. And so when earnings were moving up, the stock price was moving up. When earnings was down, the stock price would be down. Just from a pure valuation perspective, whether you're looking at price to earnings or EV to EBITDA nothing really changed for JB Hunt up until after the financial crisis.

0:14:52.6 Joseph Sinay: And so that's really the turning point, I believe, for Wall Street. When they realized that things were working out, that they had stronger trust in the management team, that they saw these large investments as a way to grow the revenues. It's more of an aggressive offensive investment rather than a defensive one. And so I think that's why they got credit for this. I don't think they would have gotten the same credit. And in fact, they didn't get the same credit when they were making these large investments in intermodal, when they were pushing for DCS, when they were shrinking the traditional freight market.

0:15:27.8 Matt Waller: You mentioned that JB Hunt 360 and the investment in the technology further enables economies of scope and scale. For those listening, economies of scope just means that your average cost decreases as you add new kinds of services, for example. That's a way to think of it. Or economies of scale as you grow your volume, your average cost doesn't increase as fast. But clearly, JB Hunt 360 is something that could be used across all of their services and maybe even new services in the future.

0:16:08.9 Matt Waller: So in some ways, it positions and it makes it easier for them in the future to grow economies of scope through this kind of a platform. I also noticed that you... I thought you did a really good job of addressing JB Hunt's total addressable market. And you looked at the total addressable market in 1987 versus today. You looked at both the projected growth and the market share, intermodals where they've got a lot of market share, final miles where they've got a lot of projected growth, and truckloads projected growth decreased over that period of time as well.

0:16:50.1 Matt Waller: I think dedicated is another one that has a huge potential growth because there's still so much of transportation in the United States that is done through private fleets. And that's another one that they're putting a lot of effort into.

0:17:06.8 Joseph Sinay: Yeah, and it's definitely synergistic. If you have somebody working in JB Hunt and they know how it works in the brokerage business, they can bring that talent into the DCS business. You can find somebody who knows how to manage the network optimization in their traditional freight business and move that to DCS. So there's a lot of synergy involved in the different businesses, especially in the talent side of things, which I think is very unique to JB Hunt. Because culturally, they've always had this customer first kind of mindset.

0:17:42.1 Joseph Sinay: Now, at the start, when they meant customer first, that just means, the capacity has to be there for the customer, the quality, the service has to be there for the customer. When they added on intermodal, that meant we may not get the customer just for the freight, we may have to move them through intermodal, which means giving a cut to our rail partners, but if that's what works best for our customer that's what we'll do. And then they added on the outsource. Maybe the best thing for our customer is for us to run it ourselves. But if that's not the best, they can run it through our intermodal, they can run it through our freight, and now you're adding brokerage.

0:18:16.3 Joseph Sinay: Now, you don't even need JB Hunt's trucks for all your routes. If somebody else external can fulfill your customer needs, then they'll hand it to them. And I think that positions them uniquely in the industry. And the same with their talent moving inside the organizations through different departments. As long as you keep that mindset, I think it's gonna be great for the customer and it's gonna be a great learning opportunity for people working in the organization.

0:18:40.9 Matt Waller: Well, I wanna skip forward to act three, if you wouldn't mind. So one thing that came through to me that we didn't really talk about when you were making your presentation was that... One thing that this really reinforced in my mind is the benefit of a long-term perspective. It took decades and decades to be able to get to the point where they were really set to take off. The culture had to be established and firmly implemented, but also the entrepreneurial part of that culture is very important. But it's so interesting, your report did a nice job of showing how... There were years where JB Hunt really wasn't creating value, and then all of a sudden they shifted gears. Would you mind speaking to that a little bit.

0:19:38.2 Joseph Sinay: Yeah, I would guess there are two components to that. The first component is from an earning standpoint, there was really a time where they were investing and there was a time where they were harvesting a little bit more. And if you had to figure it out that the investments they were making as early as 1990s, were gonna pay off really well, and that they were gonna make the right moves to eventually grow those businesses that were working well, I think you could have gone in and made that investment in the early 90s.

0:20:09.7 Joseph Sinay: However, there was the second component of what the Street was looking at. And from a reporting standpoint, JB Hunt never really broke out the results of intermodal, they never really emphasized how important, and how large DCS could be. And as a side note, JB Hunt didn't do earnings calls until recent years. And so this whole mindset was we were gonna do what was best for the company, for the customers, for our shareholders, and they didn't really care much what Wall Street was saying.

0:20:42.3 Joseph Sinay: That probably gave them a bit of cover as well in terms of making these investment decisions. Because even though you knew in the 90s they were making the right investments, they never really broke out that information to help investors realize what was going on until the early 2000s. And I think it would have been difficult to know in advance when they were gonna break out this information, but it was there. You could have figured out that it was there. And if you were the long-term shareholder, you would have made out really well over that time period anyway.

0:21:13.4 Matt Waller: So Joseph, I know your report emphasizes JB Hunt's investment in technology and how that's been so important to their future, would you mind speaking to that a bit?

0:21:25.8 Joseph Sinay: Yeah, So JB Hunt did a really good job of enabling its success through technology, much in the way of how we would now talk about Walmart investing in digital cash registers, investing in supply chain technology. In the same way JB Hunt did a lot of that. For example, in the 1980s, imagine how difficult it was to have telephones inside the trucks, but those telephones actually enabled them to communicate more frequently with home base. Which means if they were guaranteeing deliveries to customers, they could actually do it.

0:22:00.1 Joseph Sinay: You could think about other truckers they would wait three, four, five, six days before hearing back from the truckers. Whereas you could just call up the truck and you could hear back immediately what you were looking for. In the 1990s, they started using satellite and computer networks to enable two-way tracking between drivers and fleet managers. That just sped things up. Now, you don't even need to call them, you know where they are. And this is essentially GPS technology in the 1990s.

0:22:27.3 Joseph Sinay: So before we were even talking about Y2K, they already had these tracking in the trucks. And then you move into the 2000s, and they had a system which figured out how to accurately calculate profit and loss for the routes, which accounted for a lot of these optimization... Route optimization things really. And that's really what enabled them to price the routes correctly. And of course, in the late 2010s and up to the present, they're investing heavily in the brokerage piece, they're investing heavily in the Hunt 360 and a lot of these other digital initiatives.

0:23:01.5 Joseph Sinay: And I think what's really interesting about that is, brokerage is a very human-intensive process. You pay out the commissions to humans who would make the calls essentially to trucks and shippers. It's a very variable cost business, but if you can convert that from a variable business to a fixed cost business, because you would only invest in the software, you would invest in the upfront cost of the servers, the technology, the engineers. But after that, if you essentially convert a variable cost business into a fixed cost business, you essentially make it a scalable business. And I think that's a potential leg that they could have moving further out, again, building on the advantages that they've already built based on technology.

0:23:44.6 Matt Waller: Yeah, and that's something I think people didn't think about early on, especially when they got into integrated capacity solutions. I think people didn't understand that, "Hey, this is kind of mirrors intermodal to some degree in some ways." And the way they're transforming it, that is. So Joseph, I can tell that you really enjoy finance, but what is it that's drawn you to it? And why do you think it's so important?

0:24:16.8 Joseph Sinay: To me it's a search for truth, it's a search for answers. And I think this is an industry that allows me the great benefit of learning more about great companies, learning about great management, understanding what drives them, what motivates them, what makes the company work. It's really a search for that truth that drives me. And this is a case study, and I hope that if we rewind time... And I was looking at this in the 90s or in the 2000s, or even at the 2010s, I would have found this truth, which is that it's a great company making the right moves led by great people.

0:24:51.1 Joseph Sinay: That's what I think that business is all about. It's figuring out the truth, and it's putting resources behind that conviction. Because it's easy to go out there and make comments about companies, tell people you should invest in this, invest in that, it's really an opportunity to bet on the truth that you believe in and have the market tell you whether you're right or wrong down the line.

0:25:15.7 Matt Waller: Thank you so much, Joseph, for joining me today. I really appreciate it.

0:25:20.4 Joseph Sinay: Thank you so much. I'm happy to be here.

0:25:22.2 Matt Waller: Thanks for listening to today's episode of the Be EPIC Podcast from the Walton College. You can find us on Google SoundCloud, iTunes, or look for us wherever you find your podcast. Be sure to subscribe and rate us. You can find current and past episodes by searching, BeEPICPodcast. One word. That's B-E-E-P-I-C Podcast. And now, Be EPIC.