Hub Group Earnings: Margins Disappoint on Persistent Intermodal Headwinds
Hub Group’s HUBG third-quarter top line plummeted 24% year over year—similar to the second-quarter decline, led by persistent weakness in intermodal container demand and rates, along with softer truck brokerage pricing (though brokerage volumes were up on new business wins). Revenue missed our expected run rate on greater-than-expected intermodal volume deterioration. Logistics’ performance was mostly in line. Overall, the top-line pullback is not unexpected given muted retail-sector inventory restocking and anemic import activity.
Hub’s flagship intermodal revenue, which the firm no longer discloses, was down in the third quarter, due in part to a 16% decline in volume, along with lower fuel surcharges and easing accessorial income. We also suspect core intermodal pricing saw headwinds from depressed rates in the competing truckload sector, which temper intermodal’s value proposition.
Hub’s operating margin deteriorated 450 basis points to a disappointing 4.2%, driven by lost leverage from lower intermodal volumes, falling accessorials, and lower brokerage segment sell-rates to shippers. These factors were likely only partially offset by higher logistics and dedicated profitability and lower purchased transportation costs (including a greater mix of insourced intermodal drayage activity). The total margin fell solidly short of our anticipated run rate. Note that the firm’s intermodal and transportation solutions segment (which houses its intermodal and dedicated businesses) posted a paltry 2.3% margin, versus 10.1% in the same period last year.
Given the underwhelming overall performance in the quarter, we will be dialing back our medium-term revenue and margin forecasts, which will likely have a 2%-5% downward impact on our $83 DCF-derived fair value estimate.
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