Morningstar | Intermodal and Highway Brokerage Pricing Backdrop Remains Robust in Hub’s 3Q
In the third quarter, narrow-moat Hub Group’s organic gross revenue increased approximately 11% year over year, when excluding the Mode division, which was divested during the quarter (as previously announced), and Estenson’s dedicated trucking operations (acquired third-quarter 2017). Top line growth was driven by improvement in intermodal pricing conditions and strength in sell rates (to shippers) in the highway brokerage unit. Both segments are benefiting nicely from unusually tight truckload-industry capacity, which has created a highly favorable pricing backdrop for both intermodal and brokerage. Intermodal revenue increased a robust 20% on volume growth, strong core price increases and higher fuel surcharges, while highway brokerage sales were up 8%, mostly on pricing. Logistics revenue declined 11% on account of a few lost customers (reflecting in-sourcing and a bankruptcy), though new business trends and the sales pipeline appear healthy.Overall, Hub’s underlying organic top-line growth and operating profitability didn’t deviate drastically from our expectations. Since our longer-term midcycle revenue growth and margin assumptions remain mostly intact, we do not expect to materially alter our $41 fair value estimate. As of market close on Oct. 25, Hub’s shares were trading in fairly valued territory.
We continue to believe capacity in the competing full-truckload industry will remain tight throughout the rest of 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 as well as key intermodal peers like J.B. Hunt and Schneider National. We note Hub’s intermodal volume increased 3% year over year (roughly 4.5% year to date), compared with an anemic 1.3% rise for all of 2017.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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