Hub Group Faces Challenges In 2023 Amid Cooling Retail Freight Demand

HUBG’s This autumn Outcomes and Outlook: Prime-Line Development however Working Margin Decline

Hub Group, Inc. (NASDAQ:HUBG) delivered year-over-year top-line development of two% within the fourth quarter, although gross sales got here in barely under expectations attributable to a greater-than-expected falloff in truck brokerage sell-rates. The outcomes and outlook had been in step with the broader pattern of retrenchment within the retail sector, which has been pressuring freight volumes within the trucking and logistics sectors. Nevertheless, this was partially offset by lingering intermodal contract pricing tailwinds. HUBG’s working margin declined 130 foundation factors yr over yr to eight.1%, pushed by softer truck brokerage internet income and a decrease intermodal gross margin share, together with rising rail bought transportation outlays.

In 2022, the corporate noticed a stable income development of over 26%, led by contract pricing momentum and tuck-in offers akin to Choptank and TAGG Logistics. Regardless of a 3.5% decline in intermodal volumes attributable to rail service challenges, the corporate’s working margin improved to a powerful 8.9% because of adjustments in enterprise combine and robust contract pricing.

An Overview of the Second-Largest Intermodal Advertising and marketing Firm

HUBG is the second-largest intermodal advertising firm and one of many 20 largest asset-light truck brokers by gross income. It operates the second-largest intermodal fleet within the business and has an approximate 10% market share. Hub has constructed intermodal and truck brokerage networks which are engaging to prospects and suppliers, attributable to its refined IT techniques, market know-how, and huge quantity of masses. The corporate’s main rail carriers are Norfolk Southern (NSC) and Union Pacific (UNP). The truckload capability scarcity in mid-2020 by means of 2022 led to elevated contract pricing and intermodal demand, however the onset of rail service shortfalls in second-half 2021 impacted Hub’s container volumes. The service ranges at the moment are recovering, however retail finish market demand is softening. The outlook for 2023 is a yr of normalization, earlier than recovering in 2024. The corporate expects single digit restoration within the intermodal market quantity and core pricing.

The Lengthy-Time period Traits and Development Potential of Intermodal Transport

Intermodal delivery has optimistic long-term developments pushed by constraints on truckload capability development and efforts by shippers to cut back transportation prices. The intermodal market share within the jap US has potential for enlargement, providing development by means of share good points from shorter-haul trucking. HUBG has been enhancing its service attain by means of tuck-in acquisitions within the devoted trucking and outsourced logistics sectors.

Affect of Cooling Retail Freight Demand on Operations

The retail sector’s demand for freight has decreased considerably because the stock restocking surge ends, resulting in a possible lower in HUBG’s general freight volumes. Contract pricing throughout the intermodal, truckload, and asset-light brokerage sectors will return to regular in 2023 as capability limitations have lessened. HUBG’s intermodal division, nevertheless, faces challenges in transportation prices and buyer satisfaction as a result of efficiency of its associate Class I railroads, that are at present going through community difficulties associated to labor.

Scale-Primarily based Price Benefit and Community Impact

HUBG’s operations profit from a mix of scale-based price benefit and the community impact, making it a significant participant in each the intermodal and truck brokerage markets.

In its freeway brokerage enterprise, HUBG serves as a beneficial middleman, matching capability from asset-based truckers with shippers. Its community of over-the-road carriers is extremely beneficial to shippers all through the cycle, partly as a result of small measurement of most truckload carriers and structural constraints on driver availability.

In its flagship intermodal section, Hub’s huge buyer base generates vital shopping for energy and most popular entry to rail capability, making it a lovely supply of freight alternatives for the Class I railroads.

Whereas there are alternatives for HUBG to broaden its enterprise, its asset-based devoted truckload operations shouldn’t have a aggressive benefit as a result of lack of differentiation within the asset-intensive trucking business. Rising fleet measurement doesn’t essentially result in decrease prices, and truckload carriers battle to determine a aggressive edge by means of price benefit, intangible property, environment friendly scale, switching prices, or community impact.

Valuation

Following the discharge of the fourth-quarter outcomes, my honest worth estimate for HUBG is $82 per share. In 2021, HUBG skilled a major surge in income with a 21% enhance, largely as a result of excessive demand for restocking by retailers and the restricted availability of intermodal and trucking capability, resulting in distinctive pricing situations. Regardless of challenges in intermodal volumes brought on by rail community congestion, sturdy pricing and elevated charges contributed to sturdy income development. The corporate’s whole EBIT margin additionally improved to five.6%, pushed by yield good points that outweighed rising driver wages and community inefficiencies.

Nevertheless, for 2023, a decline in demand and pricing is predicted within the intermodal and trucking markets, however not a significant recession within the freight business. There could also be a slight enhance in intermodal quantity attributable to pent-up truck-to-rail conversion demand. I count on an approximate 4% decline in whole income and a 300 bps compression in margins. Nevertheless, if the US avoids a deep recession, HUBG has the potential for natural top-line development of 4% and my honest worth estimate would enhance to $110 per share.

Notice that my income and margins assumptions are a bit decrease than HUBG’s lower-end steering for 2023 however are extra aligned to the long-term steering.

Beneath are my important assumptions.

Threat and Uncertainty

HUBG’s operations, together with intermodal, devoted trucking, and asset-light freight brokerage, are topic to the financial well being of North America, serving purchasers in each industrial and retail sectors. Moreover, HUBG’s intermodal operations are contingent on the service high quality offered by its associate Class I rail carriers. Regardless of railroads making appreciable investments of their infrastructure, the extent of buyer satisfaction is usually past HUBG’s management. Environmental rules have triggered tractor price inflation previously, and there’s a risk that future rules would require the adoption of electrical Class 8 truck expertise earlier than it’s economically viable.

Conclusion

Within the fourth quarter of 2022, HUBG reported a 2% year-over-year enhance in income, however a decline in working margin to eight.1%. Regardless of challenges within the retail sector, the corporate noticed sturdy development of 26% for the yr, pushed by contract pricing and tuck-in offers. The working margin improved to eight.9% attributable to adjustments in enterprise combine and robust contract pricing. HUBG has been increasing its service attain by means of acquisitions and intermodal delivery has optimistic long-term developments.

Nevertheless, the retail sector’s demand for freight has decreased and the intermodal division is going through challenges with transportation prices and buyer satisfaction. Primarily based on my honest worth estimate of $82 per share, there’s a 16% draw back to the present value. If the US avoids a deep recession, the honest value might enhance to $110 per share, a 13% upside. As the danger of a recession in 2023 is excessive and the risk-reward profile is unfavourable, I counsel avoiding the inventory presently.