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Intermodal Operations Boast Strong Growth Potential for this Third-Party Logistics Firm

March 03, 2014 | About:

Hub Group Inc. (HUBG) is a U.S. third-party logistics firm that specializes in intermodal shipping via railroad and truck. Apart from its flagship intermodal services, which generate 65% of sales, the firm provides highway brokerage and operates Unyson Logistics, which provides outsourced transportation management. These two segments account for 20% and 15% of sales, respectively.

Within its intermodal business, its fleet of containers is the second largest in the industry with around 26,000 units, which has garnered the firm roughly a 15% market share. In this segment, the largest provider in terms of revenues is J.B. Hunt Transport Services Inc. (JBHT), while Pacer International (PACR) also stands as a strong competitor.

Business Model

Hub Group is the largest intermodal marketing company in the U.S. and, with the acquisition of Mode in 2011, it has also positioned as one of the top five domestic truck brokers. Its vast networks, sophisticated IT systems and know-how expertise, allows transportation of high-volumes of load with strict control of its containers, reflecting an efficient management. Furthermore, the company employs an asset-light business model, which helps support profitability when freight demand softens.

Intermodal operations being its core business, the improvement the rails have made in terms of services, and strong investments in infrastructure over the last decade, significantly favor the firm’s operations. However, customers’ satisfaction is out of Hub’s control in this segment, and a decay in service quality standards of rail carriers could risk cargo diversion to truckers. In this event, however, the firm’s sturdy truck brokerage operations would temper the effects of such a shift.

Economic Moat

Hub’s vast network and scale have garnered the company a narrow economic moat. Its scale generates cost advantages that empower its value propositions and, in turn, create barriers to entry. For one, its huge customer base and container fleet in its intermodal segment allow the company great buying power as well as flexible capacity. And second, its vast network of over-the-road carriers is becoming increasingly valuable, since rising government regulation and weak credit availability for small carriers threaten to generate shortages in the trucking industry.

As for pricing, its intermodal segment will probably remain moderate this year due to stiff competition from other intermodal operators seeking to gain market share. However, it is expected to follow an upward trend in the coming years, especially if truckload capacity tightens.

A Solid Stock

Hub Group’s stock trades at 21.1 its trailing earnings compared to the industry average of 36.60. Its earnings per share show an outstanding growth of 26.20% compared to its peers 8.50% average. Its return on equity, in turn, showcases an attractive 13.60% compared to the industry median of just 6%. And its return on capital reached a high 41.5% against its peers’ 7.30% average.

The company doesn’t currently pay dividends, and share repurchases have been quite lean. The stock isn’t therefore attractive for investors in search for regular cash returns. Nevertheless, the company is financially healthy and growth and profits are expected to deliver continuous upturns. Consequently, even though investment guru Joel Greenblatt (Trades, Portfolio) recently sold out his holdings in the company, I feel Hub’s stock is a solid investment to keep in years to come.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


Rating: 5.0/5 (3 votes)

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