Morningstar | Winter Weather Hits Hub’s 1Q Intermodal Volume, but Yields Still Strong and Margins Healthy. See Updated Analyst Note from 30 Apr 2019
In the first quarter, narrow-moat Hub Group posted gross-revenue growth of 11.5%, excluding Mode (divested third-quarter 2018), slightly below our expectations due to intermodal volume pressure stemming from flood-related disruption in Iowa and Nebraska. Relative to the year-ago period, the top line increase was driven in part by 8.5% intermodal segment growth. Intermodal posted solid yield gains (high-single digits) on the back of robust contract pricing conditions over the past year (aided by tight truckload market capacity in 2018). The trucking capacity crunch eased by year-end 2018, but intermodal pricing appears to be holding up despite a likely lower discount on many lanes relative to the competing trucking market, which has seen spot rates retrench from historic highs. Intermodal volume fell 1% on weather-related headwinds, though management noted Class-I railroad service has improved drastically and expects volume to rise modestly for the year. The fourth-quarter 2018 Case Stack acquisition, along with new customer additions in the dedicated trucking segment also contributed to overall top-line growth. Hub’s total operating margin expanded 180 basis points, to 3.8%, on leverage from revenue growth and an uptick in gross profit margins, partly offset by deal-related amortization and higher compensation outlays.We raised our operating margin assumptions for 2019, but our midcycle revenue and margin assumptions remain intact. We don’t expect to materially alter our $41 DCF-derived fair value estimate. Hub's shares are appropriately valued, in our view. That said, this is a more palatable market valuation relative to most of 2018, when Hub and its logistics peers were hovering in overvalued territory in our view on lofty investor expectations rooted in the unusually robust pricing backdrop for intermodal providers and truck brokers. In terms of guidance, management expects EPS of $3.25 to $3.40, which compares favorably to previous consensus of $3.21.
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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