Hub Group (Ticker: HUBG) is a ~$3bln market cap transportation provider with >$4.5bln annual sales and a pristine
balance sheet ($166mln net debt position as of 4Q23). Established in 1971 and still run and controlled by
the Yaeger family via super‐voting Class B shares, the company is the second largest intermodal provider
in the US. It has grown into a leading logistics company as well, with less cyclical services including final mile
delivery, brokerage, reverse logistics, and transportation management.
What is Intermodal?
Intermodal transportation is exactly what it sounds like – transportation between modes. For domestic
intermodal providers in the US, that typically refers to a cargo container that arrives at a port, gets
transloaded into a domestic container, moves on a railroad, and then transfers to a truck for delivery to
a distribution center or store. At its simplest, we can picture an intermodal move like this:
Intermodal boasts several advantages over pure trucking. First, since rail haulage is significantly cheaper
per mile than trucking, intermodal typically offers a 10‐30% cost advantage. Second, as shippers
increasingly focus on emissions and ESG, intermodal is 3‐4x more fuel efficient and offers 75% CO2
savings compared to trucking. The main disadvantage to intermodal is speed, with delivery times
modestly slower than trucking alone.
Structurally, intermodal is a “good business.” Domestic intermodal shipments grow structurally over
time as freight loads convert from on‐highway to rail.
Furthermore, the business is capex‐light. With the ability to rely on third‐party truckers (drayage) and
rail operators, the main assets required for large intermodal providers are steel containers. Finally,
whereas the US truckload market is remarkably fragmented with over 700,000 for‐hire‐carriers and 90%
operating 6 or fewer trucks, the intermodal industry is consolidated – the top 3 players control 2/3 of
the market.
The setup
It’s hard to overstate how challenging freight markets were in 2023. Following an epic spike in freight
rates coming out of Covid, a combination of easing supply chains, excess capacity, and customer
destocking caused a collapse in freight demand and with it, spot rates for trucking, ocean, and air.
Freight metrics such as tender acceptance rates and bid compliance hit levels not seen since 2009. An
illustration of transport EPS in 2023 reveals the extent of the carnage. Hub Group was no exception:
Even before the 2023 freight downturn though, the intermodal industry has counterintuitively faced
market share losses over the past few years. Beginning in the later half of the last decade, US railroads
adopted various forms of Precision Scheduled Railroading (PSR). This strategy involved reduced
headcount via lower rail congestion and an effort to speed up train speeds to boost margins. The
implementation of PSR was challenging, and resulted in poor rail service, as measured by train speeds
and dwell times (lower is worse in this chart)
Shippers, concerned about rail performance, diverted freight from intermodal to trucking. Then, just as
service metrics began to improve in 2019, Covid struck. Lower rail headcount and surging post‐Covid
demand revealed the fragility of the PSR model and as seen in the above chart, rail service metrics
deteriorated – significantly – once again. Stung by poor results, railroads have since invested in both
headcount and reliability, and service metrics have improved significantly through 2023. As rails reprioritize
intermodal as a secular growth driver, we believe there is significant pent‐up market share for
leading intermodal providers to capture.
Hub’s valuation is worth highlighting. Despite the company’s favorable intermodal position and capexlight
business model, the stock trades at a discount to its peers, including lower‐quality and capexintensive
trucking companies:
And while 20x PE doesn’t scream “cheap,” it also doesn’t tell the whole
story. Because of Hub’s low‐capital business model and significant excess containers, we believe capex
will run significantly below depreciation into the medium‐term; in fact, we see 2024 capex at <50% of
depreciation. So despite a high‐teens PE, we believe Hub Group boasts a “trough cycle” FCF yield
approaching 10% today, well above peers.
Hub Group possesses significant levers to grow earnings. Near‐term, the company is focused on
recapturing lost intermodal market share, and while this may temporarily involve lower pricing, the
operating leverage from additional volumes will be significant for their underutilized system. Hub has
also negotiated lower chasses costs and more favorable rail contracts that allow rail costs to flex down
with intermodal rates.
The company is also leveraging its strong balance sheet to acquire less cyclical logistics assets. Most
recently, it announced an acquisition of Forward Air’s final‐mile division for $262 million. The acquisition
is immediately accretive to earnings and provides strong revenue synergy opportunities. Even after this
acquisition, the balance sheet remains effectively unlevered, offering additional M&A and stock buyback
opportunities.
We believe midcycle earnings power for Hub Group currently approaches $9/share. Given peer
multiples and the company’s cash generation capabilities, this can lead to a $125‐150 stock price as the
cycle turns, versus the stock currently in the high‐80s. Finally, given the company’s position as the #2
intermodal provider in the country, should the Yeager family ever decide to sell, we believe the
company would see significant interest from both financial and strategic players.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Generation of FCF (10% yield)
Capital Deployment (accretive M&A and share repos)
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