Morningstar | Constrained Truckload Capacity a Big 2Q Tailwind for Hub's Intermodal and Truck Brokerage Operations
In the second quarter, narrow-moat logistics specialist Hub Group's organic gross revenue increased an impressive 19.5% year over year on accelerating intermodal pricing conditions and strengthening sell rates (to shippers) in the highway brokerage unit. Both segments are benefiting nicely from unusually tight truckload-industry capacity, which is driving better truck-to-rail conversion activity for intermodal and creating a favorable pricing backdrop for both intermodal and brokerage. Previous new business wins and growth among existing accounts at Unyson Logistics also contributed to the revenue increase. Hub’s top line exceeded our expected run rate because of greater-than-anticipated acceleration in intermodal pricing, which was up 13% all in. Operating margins at Mode are lagging slightly, but total profitability was largely in line with our forecast as Hub segment margins were quite healthy (up 130 basis points, to 2.8%).We expect to boost our $39 fair value estimate by approximately 5% due to raising our top-line growth forecast for 2018 and 2019, as the intermodal and truck brokerage markets are showing few signs of slowing in the back half of 2018, especially in terms of rates. That said, as of market close on Aug. 1, Hub’s shares are trading in modestly overvalued territory--a common theme across our asset-light logistics coverage universe. In our view, the highly favorable operating backdrop is already baked into investor expectations.
We continue to believe capacity in the competing full-truckload industry will remain tight throughout 2018, with help from widespread adoption of electronic logging devices, which is tempering productivity for a large swath of the carrier base. This is providing a much needed boost to truck-to-rail conversion activity and contractual rates for Hub Group and key intermodal peers like J.B. Hunt and Schneider National. Hub-segment intermodal volume increased 4% year over year (5% on average in the first half), compared with an anemic 1.3% rise for all of 2017. Intermodal pricing including core rates, fuel and mix was up 13% (high-single digits in the first quarter).
Management boosted its 2018 guidance on the back of robust intermodal rate conditions, now calling for consolidated revenue growth of 13%-18% (previously high-single digits to low-double digits) and EPS in a range of $2.73-$2.83 (previously $2.34-$2.44). This compares with previous Street consensus for EPS of $2.44.
Hub Group is a supply chain management company that provides transportation and logistics solutions. Through its network, the company arranges for the movement of freight in and out of every main city in the U.S., Canada and Mexico. The company's lines of business include: intermodal, which arranges for the movement of its customers' freight in containers and trailers; dedicated trucking, which provides a dedicated fleet of equipment and drivers to each customer; trust brokerage, which operates truck brokerage operations in the U.S.; and logistics, which provides a range of transportation management services and technology solutions, and delivers supply chain services to consumer-packaged goods clients.
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