U.S. markets open in 5 hours 52 minutes
  • S&P Futures

    3,879.25
    -19.50 (-0.50%)
     
  • Dow Futures

    31,391.00
    -118.00 (-0.37%)
     
  • Nasdaq Futures

    13,200.25
    -79.50 (-0.60%)
     
  • Russell 2000 Futures

    2,259.70
    -15.10 (-0.66%)
     
  • Crude Oil

    59.92
    -0.72 (-1.19%)
     
  • Gold

    1,715.80
    -7.20 (-0.42%)
     
  • Silver

    26.01
    -0.67 (-2.50%)
     
  • EUR/USD

    1.2016
    -0.0043 (-0.36%)
     
  • 10-Yr Bond

    1.4460
    0.0000 (0.00%)
     
  • Vix

    23.58
    -4.37 (-15.64%)
     
  • GBP/USD

    1.3887
    -0.0033 (-0.24%)
     
  • USD/JPY

    106.8720
    +0.1420 (+0.13%)
     
  • BTC-USD

    49,004.52
    +2,877.43 (+6.24%)
     
  • CMC Crypto 200

    984.02
    -2.63 (-0.27%)
     
  • FTSE 100

    6,598.54
    +10.01 (+0.15%)
     
  • Nikkei 225

    29,408.17
    -255.33 (-0.86%)
     

J.B. Hunt Transport Services, Inc.'s (NASDAQ:JBHT) Stock Is Going Strong: Have Financials A Role To Play?

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·5 min read
  • Oops!
    Something went wrong.
    Please try again later.

J.B. Hunt Transport Services (NASDAQ:JBHT) has had a great run on the share market with its stock up by a significant 9.3% over the last week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to J.B. Hunt Transport Services' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for J.B. Hunt Transport Services

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for J.B. Hunt Transport Services is:

20% = US$497m ÷ US$2.5b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.20.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

J.B. Hunt Transport Services' Earnings Growth And 20% ROE

At first glance, J.B. Hunt Transport Services seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 13%. However, for some reason, the higher returns aren't reflected in J.B. Hunt Transport Services' meagre five year net income growth average of 4.1%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

We then compared J.B. Hunt Transport Services' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.9% in the same period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if J.B. Hunt Transport Services is trading on a high P/E or a low P/E, relative to its industry.

Is J.B. Hunt Transport Services Making Efficient Use Of Its Profits?

A low three-year median payout ratio of 22% (implying that the company retains the remaining 78% of its income) suggests that J.B. Hunt Transport Services is retaining most of its profits. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, J.B. Hunt Transport Services has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 16% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we feel that J.B. Hunt Transport Services certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.