XTN - Hub Group: Positioned To Grow

2023-07-10 12:14:25 ET

Summary

• Hub Group, Inc., a freight and logistics company, is considered a speculative investment due to uncertainty in the industry and economy. The stock is currently rated as a Hold opportunity.
• Five preconditions for potential investment include positive freight demand, stabilized costs, consistent real growth, improved sentiment about North American and China's economies, and a business plan incorporating Artificial Intelligence.
• Despite a 6% uptick in share price in June, soft growth and momentum are expected to dominate through the remainder of the year. The company's Q2 '23 EPS is expected to be about half of last year's.

Financially Healthy In An Uncertain Industry

Hub Group, Inc. (HUBG), the freight and logistics company, is financially healthy but a speculative investment, at this time. The share price is fairly valued but the solidity of the freight and logistics industry is uncertain while the economy is dodgy.

Hub Group will be one of the stocks we will consider an opportunity for retail value investors when the North American economy reignites; for now, the ~6% uptick in the share price in June makes the stock a Hold opportunity. Some might consider it a Moderate Sell if an investor wants to take some profits. But five preconditions for potential change must be evident before we assess the stock worth a Moderate Buy rating.

The “freight recession” bottoms out; i.e., freight demand turns positive for two to three quarters sequentially. Domestic manufacturing production and imports of goods define demand in this industry. Economist Liz Ann Sonders tells us that the March Dallas Fed manufacturing index stumbled in the first quarter of ’23. “((N))ew orders and shipments fell further into contraction,” and the manufacturing and the trade inventory-to-sales ratio was “unchanged from March to April… it was still up considerably from a year ago but not elevated relative to history.” Thus, we do not expect demand for freight and logistics to swell.

Second, freight rates , equipment, and borrowing costs must stabilize. A third precondition before investing is having freight volumes consistently increase in real growth over several quarters.

Fourth, sentiment is erratic about the future of North American and China’s economies. Egregious declamations dominate the buzz about the two big economies with a plethora of economists and analysts forecasting a recession and stocks tumbling. The University of Michigan Consumer Sentiment Index is looking better, but sentiment languishes well-below previous years.

A fifth precondition to investing is having Hub Group management present shareholders with a business plan and budget that integrates vastly popular Artificial Intelligence into the company’s noteworthy tech platform . The plan must discuss how tech investments in AI will institute further cost savings, optimize supply chain processes, increase asset utilization, and improve inventory management.

In his last shareholders talk on April 27, ’23, the CEO spoke about tech tangentially; for example, the company is “enhancing our technology platform.” Yet automation dominates global logistics trends and is critical to maintaining optimal productivity and efficiency of supply chain management.

In the meantime, investors ought to monitor the industry and Hub Group stock for news and moves that can be valuable for knowing when to invest.

Company Profile

Hub Group, Inc., sells transportation and logistics management services in North America. The company plans and moves goods to dedicated, regional destinations and internationally by truck, railcar, flatbed, and in temperature-controlled transportation equipment. Logistics services find solutions in transportation management, freight consolidation, warehousing and fulfillment, final mile delivery, and parcel services using its fleet of more than 7,000 trucks, trailers, containers, and other vehicles. As of December 31, 2022, it owned approximately 48,000 dry, 53-foot containers, as well as 750 refrigerated and 53-foot containers. The company was founded in 1971.

The share price is +12.2% over the last 12 months but is higher by less than 2% YTD after reporting Q1 ’23 results last April. Hub Group experienced a 9% to 12% decline in its Intermodal and Transportation Solutions other segments. The Logistics segment reportedly declined 13% in Q1. Total revenue for Q1 ’23 was $1.2B.

Last year’s Q2 EPS was $3.03. We expect lower demand resulting in declines across segments to persist through most of 2023; we expect the Q2 ’23 EPS to be about one-half Y/Y or $1.45 to $1.50. Hub Group historically beat quarterly earnings estimates, sometimes substantially, every quarter going back to Q1 ’21. The next earnings announcement is scheduled for August 2, 2023.

Flagging Growth & Momentum

We attribute the Hub Group share price climb starting June 2023 from about $73.20 to +$80 on June 30 to four factors. First, U. S. and Canadian labor markets are reportedly strong giving hope to brighter expectations for a creeping macroeconomic recovery. The SPDR S&P Transportation ETF ( XTN ) shares jumped in June from $72 to $84; the shares are +25.27% YTD. They sport a Buy Quant Rating from Seeking Alpha.

Second, cost cutting began a year ago at Hub Group and is having an impact in FY ‘23. The third factor underpinning the stock uptick is Hub’s $200M Class A common stock repurchase program announced last October. And fourth, cash flow is more than sufficient for management to pay down debt.

Nevertheless, S A maintains a Hold Quant Rating on Hub Group because soft growth and momentum are expected to dominate Factor Grades through the remainder of this year.

When we multiply the estimated FY ‘23 annual EPS of $6.50 x’s a 12.56 PE, our forecast is for an average price per share is ~$81. That is about what the shares closed at last week. The price might move up 5% occasionally depending on economic and political news. Wall Street analysts surveyed by S A are divided with 8 considering the stock a value to Buy and 9 assessing it worth only a Hold.

Risks

We do not deem the stock worth a Sell rating at this time unless it is to take some profits. Hedge funds bought then sold 26K shares last quarter as the price moved up.

Other than the risks from an economic upheaval and stock market crash that we discussed previously, we do not foresee any serious risks. Short interest is a mere 1.32%. The company’s Capital Structure, Profitability, and Cash Flow appear strong; the company used some of the cash to pay down debt and acquire 7 transportation companies, including 3 in the last 5 years.

Takeaway

The share price is down from its 52-week high of over $104 each. The company has a healthy balance sheet but revenue is likely to be down in FY ’23 to $4.68B from $5.34 in FY ’22. Annual earnings in ‘23 might hit $6.35B but that is down substantially from last year’s $10.56B. Adding in market and macroeconomic uncertainties, we foresee the share price hovering near to where it stands in early July ’23. Companies like Hub Group, Inc move the world but information moves their stocks. Hub Group runs on data. A watchful eye and good timing can make Hub Group a good investment in the future.

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