I am as irrationally fearful of trucking container malfunctions as my dog Luna is of thunder. Since I began to explore the transportation industry, my eyes have been glued to trucks out of curiosity instead of fear. Next time you are in the passenger seat, on the train, or over a freeway bridge, you will notice how many trucking companies there are.
Coming out of the pandemic, companies with struggling supply chains used trucking to get inventories from A to B quickly.
Think back to your last Econ class and recall the classic supply and demand graph.
What happens when demand increases? So does the price.
When prices and potential profits increase, companies enter industries. In 2021, the number of trucking enterprises increased from 50,202 to 109,340 with 91.3% of fleets driving six or fewer trucks and 97.4% driving 20 or fewer. When an industry becomes more concentrated and competition grows, prices should be pushed down.
However, new and old trucking companies did not foresee staggering inflation, soaring wages, and booming gas prices for 2022. Driver wages and gas represent 42% and 26% of trucking costs respectively.
What happens when input costs like wages and fuel increase? Prices rise and demand falls.
At a time where companies have too much inventory, want to cut costs, and desire higher ESG scores, trucking is inefficient, expensive, and environmentally unfriendly.
The substitute to trucking’s depressed demand: Intermodal.
Intermodal
By definition, intermodal transportation means transportation through multiple methods. The focus of our intermodal discussion will surround the combination of trains and trucks.
- Intermodal containers are filled at docks or warehouses
- Trucks take containers to the nearest railroad station
- Containers are put on a train
- Train transports containers the majority of the journey
- Containers are loaded onto trucks that complete the delivery
Macroeconomic Tailwinds
In conjunction with the rising costs of trucking, the Fed will continue to hike interest rates and put downward pressures on consumer demand to curb inflation. Companies’ revenues and margins are going to take a hit. Retailers are going to look to cut costs wherever they can. Intermodal is not as exposed to gas prices and driver wages as trucking.
Once companies are attracted to intermodal’s affordability, they will see the other positive benefits. Intermodal transportation lowers carbon footprints thus increasing ESG scores. Target and many other companies have acknowledged that overestimations led to heightened inventories. Companies need more time to sell products. Intermodal can take around two weeks longer to move shipments from A to B, which gives companies lag time to sell goods.
Hub Group Inc. (HUBG)
The purest play in the growing intermodal industry is Hub Group Inc (HUBG).
Key Financials (as of 6/26/2022)
- Market Cap: $2,429.7 mm
- Enterprise Value: $2,544.1 mm
- EV/EBITDA: 5.3x
- Diluted P/E: 9.84x
- Current Stock Price: $70.10
Overview
Based in Oak Brook, IL, Hub Group (the “Company” or “HUBG”) is a leading US based supply chain solutions provider in North America. The main source of HUBG’s revenue is from intermodal transportation: intermodal (57% of 2021 revenue), logistics (21%), truck brokerage (16%), and dedicated trucking (6%). The Company’s fleet includes 1,000 tractors, 4,700 employees, 2,400 drivers, 4,600 trailers, and 44,000 dry foot containers in its dedicated trucking operation with 6,000 more containers on the way.
The other business arms assist intermodal activities and diversify revenue. The asset-light logistics division optimizes supply chains, minimizes carbon footprints, and provides shipment end-to-end coverage. Hub Group is the only intermodal provider with end-to-end visibility.
Hub Group utilizes third party trucking companies to transport its containers. The trucking brokerage connects trucking companies to Hub Group. In a time where there may be a surplus of trucking companies, Hub Group is able to find the most cost effective partners to complete intermodal processes.
The dedicated trucking arm facilitates and supplements the intermodal process, but the Company does not rely on trucking as a primary source of revenue.
Financial Statements
The Company is fundamentally sound and has a healthy, low debt, and risk averse balance sheet with growing revenues and profitability. Since 2018, HUBG has produced positive free cash flow, reinvested in the company both in organic and inorganic growth, and pays down debt consistently. The balance sheet looks well positioned in an uncertain economic landscape. The Company is sitting on $206.9 mm of deployable cash and a 0.2x Net Debt/EBITDA ratio, which could be used to continue its history of paid in cash acquisitions.
Competitor comparison
JB Hunt (JBHT), Knight Swift (KNX), and Schneider (SNDR) are all competitors in the intermodal space. JB Hunt has the largest intermodal fleet. Hub Group has the second largest. Knight Swift and Schneider are one-fifth and half the size of Hub Group respectively.
Business Models
Hub Group’s greatest differentiator is the establishment of intermodal as its primary focus. This positioning gives HUBG the advantage of proven processes, strong relationships, and branding.
Highest Revenue/Container
Hub Group generates the highest revenue per container out of this set of competitors. This metric indicates the company is doing something right. It could be the end-to-end visibility, customer service, and/or reliability, but the highest revenue/container displays a willingness to pay a premium to work with Hub Group.
Risks
Some risks to Hub Group’s near term success include a significant economic downturn, reliance on railroads, and increased competition. Nearly a third of Hub Group’s revenue comes from ecommerce, which exposes the Company to a severe disruption in consumer spending. There are very few railroad companies in the United States, and a Union Pacific could increase the cost to use its railroad. As intermodal becomes more popular, companies like Knight-Swift and Schneider will move efforts towards building out their fleets.
Hub Group benefits from a diversified customer base and revenue structure, established relationships, and industry notoriety. In the event of a recession, consumer staples demand could offset losses from consumer spending. The asset light trucking brokerage and logistics arms can support decreases in intermodal revenue. Growing intermodal companies will have to build relationships with Union Pacific that Hub Group already possesses. Companies have displayed that they are willing to pay a premium to work with Hub Group, and the emergence of new intermodal competition should not change that.
Continue the Research
Before making an investment decision, I suggest reading more on Hub Group’s financial performance.
HUBG is trading at an EV/EBITDA multiple of 5.3x, which is near where it traded both during the Great Recession and the onset of Covid-19. The stock keeps getting swept into transportation sell-offs, which could be an advantageous market inefficiency. The Company is allocating its capital to increase economies of scale, improve technological capabilities, and seek out acquisitions. These things could change, which is why you need to continue the research. The FY2021 10-K and Q1 2022 investor presentations are good places to start.
During one of my Microeconomics lectures in Fall 2021, my professor described equilibrium as the white rabbit the market will indefinitely chase but never catch. The market will never react perfectly or as we completely expect, but I use supply and demand scenarios to create a base of reasoning to make investment decisions.
If you have more questions or want to talk all things HUBG, do not hesitate to reach out on twitter, instagram, or shoot me a text.
Pendulums will swing, tides will shift, and winds will change, which is why you must remain observant of events that affect your supplies and demands and continue to…
Employ your curiosity.
-Maximus Beach
Learn more about Maximus Beach’s background here.
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