Hub Group Inc Class A (NAS: HUBG)
Last Price: USD: 78.82|Fair Value: USD: 75.00
Business Strategy & Outlook
Hub Group is the second-largest intermodal marketing company and also ranks among the 20 largest asset-light truck brokers in terms of gross revenue. In its flagship intermodal division, Hub contracts with the Class I railroads for the line-haul movement of its owned containers. It operates the second-largest fleet in the industry, with exclusive access to more than 30,000 containers, and enjoys an approximate 10% market share. By gross revenue, J.B. Hunt is the largest intermodal marketing company, followed by Hub and the intermodal divisions of STG Logistics, Schneider National and Knight Swift. Hub has constructed intermodal and truck brokerage networks of sufficient scale to be attractive to customers (shippers) and suppliers, both of which benefit from using a larger intermediary.
Sophisticated IT systems and market know-how enable customers to outsource intermodal shipping to an expert specialist, while Hub’s large volume of loads and significant control of containers make it an attractive customer to the Class I railroads. The company’s primary rail carriers are Norfolk Southern in the East and Union Pacific in the West. Rates in the competing truckload market corrected in 2019, pressuring intermodal value proposition relative to trucking, and initial pandemic disruption pressured container volume into early 2020. However, truckload capacity tightened drastically by mid-2020 (remaining scarce through most of 2022), while contract pricing soared across all modes and underlying intermodal demand jumped on heavy retail shipper restocking (intermodal cargo is mostly consumer goods). The onset of rail service shortfalls in second-half 2021 has throttled Hub’s container volume growth despite otherwise positive freight demand, but the firm is working diligently with the railroads and customers to minimize the issue. A growth across Hub’s intermodal can be seen, truck brokerage and dedicated operations will take a breather in 2023. That said, for intermodal 2.5%-3.0% normalized U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer-term, with 2.0%-2.5% pricing gains on average.
Financial Strengths
Hub Group’s balance sheet is healthy, and the firm is not overly leveraged. At the end of 2021, Hub held a manageable amount of debt, which is normally used to help finance equipment purchases (especially intermodal containers) as well as tuck-in acquisitions like the 2020 Nonstop Delivery deal. Total debt came in near $275 million in 2021. Debt/EBITDA stood at less than 1 times in 2021, versus 1 time in 2020 and a five-year average near 1.3 times. The firm held roughly $160 million in cash at year-end 2021 versus an approximate $125 million in 2020. Historically, Hub’s model generated decent free cash flow in years when it wasn’t acquiring intermodal containers. Overall, free cash flow averaged 2.5% of gross revenue over the past five years, with capital expenditures approximating 3% of sales. Capital expenditures will likely come in near 5% of sales in 2022 due in part to investment in additional intermodal containers to capitalize on growth opportunities. The 2017 acquisition of Estenson, which provides asset-based dedicated trucking services, incrementally moved Hub into the capital-intensive truckload shipping business, and the operation originally required meaningful investment in tractors to support fleet growth. Most of the firm’s logistics-segment operations, including last mile and truck brokerage, are asset light by nature.
Bulls Say
Company Description
Hub Group ranks among the largest asset light providers of rail intermodal service. Roughly 60% of revenue comes from Hub’s intermodal and transportation solutions division. ITS includes its flagship intermodal operations, which use the Class I rail carriers for the underlying line-haul movement of containers, as well as its dedicated truckload unit. Asset light truckload and LTL brokerage makes up around 20%. The remaining 20% reflects Hub’s logistics division, which provides outsourced transportation management, warehousing and fulfillment, and final mile delivery. Hub is somewhat acquisitive in that it often makes tuck-in acquisitions which expand its brokerage, logistics, and dedicated truckload offerings.
(Source: Morningstar)
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