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Hub Group Sees No Peak Season Coming

Hub Group Sees No Peak Season Coming

Hub Group, Inc. (NASDAQ: HUBG) reported third quarter 2019 earnings of $0.97 per share, well ahead of the $0.80 consensus estimate. This result excludes $0.19 per share of legal settlements and consulting expenses. 

While the multi-modal supply chain solutions provider reported a good quarter, its near-term outlook is pretty rough. Hub Group's outlook on the intermodal and general freight markets was a bit more subdued than other management teams. The company is not expecting to see any peak season uptick in demand and acknowledged that the implementation of traditional peak season surcharges is at risk. Further, the company's earnings guidance is calling for the fourth quarter, normally its strongest, to be weaker than that its third quarter results.

Hub Group expects fourth quarter 2019 earnings per share (EPS) to be in the range of $0.81 to $0.85, well below the third quarter results and the current consensus estimate of $0.98. The outperformance in the third quarter keeps the full-year 2019 consensus estimate of $3.35 intact (Hub Group's full-year 2019 adjusted earnings guidance is now $3.36 to $3.40). However, the company's anticipation of softness in the intermodal markets now, through the fourth quarter and into early 2020 may cause some consternation amongst investors. Hub Group expects to see intermodal volume declines in the mid to high single-digit range in the fourth quarter.

The company's intermodal division reported a 7% decline in revenue to $540 million. Intermodal volumes declined 9% year-over-year as volumes were down 11% in local west and local east with transcontinental volumes down only 3%. By month, volumes declined 4% year-over-year in July, down 13% in August, down 11% in September with October down 10%. Management indicated that the only bright spot has been some relative tightness in the West as well as Chicago in the last couple of weeks.

Management called out a softer demand environment and increased competition in both truckload (TL) and intermodal markets as the culprits. Additionally, rail lane cancellations resulted in a point of the volume decline. Management doesn't believe that it lost market share in the quarter as industry volumes were down 7%. Excluding the loss of a customer, Hub Group likely saw similar volumes to that of the broader market.

Somewhat concerning is that regional spot truck rates were actually lower than intermodal rates in the East. Further, management said that some of its intermodal customers are looking to rebid contracts given the weak environment and the increased intermodal competition amongst providers. However, management said that the company will remain rate disciplined moving forward.

Hub Group's Key Performance Indicators

Revenue in truck brokerage declined 10% year-over-year to $110 million. Loads increased 14%, but lower fuel revenue, pricing and a mix favoring less-than-truckload (LTL) drove the decline in revenue. Logistics revenue grew 27% year-over-year to $189 million and dedicated revenue dipped 5% to $75 million.

Hub Group saw a 2% year-over-year decline in total revenue to $913 million. Consolidated gross margin improved 250 basis points year-over-year to 14.8% (adjusted gross margin was 15.1%). Adjusted operating income improved 32% year-over-year to $46 million and the company's adjusted operating margin reached goal at 5%.

"We have been focused on executing our strategy, key tenets of which include delivering a best-in-class experience for both our customers and employees, diversifying our service offerings and investing in technology while increasing profitability and our return on invested capital. We've improved profitability through operational enhancements, revenue management, and procurement savings in transportation and general and administrative costs. These initiatives have driven our adjusted operating margin to our goal of 5.0% in the third quarter, and more importantly, position Hub for success," said Hub Group's Chairman and CEO Dave Yeager.

Not all is lost. The company has several cost efficiency initiatives in place, expects capacity to tighten in the second half of 2020, possesses a full pipeline of acquisition targets and remains on track to achieve $6 billion in revenue by 2023.

The company expects its profit improvement initiatives, "operational enhancements, revenue management and procurement savings" to yield more than $60 million of "run-rate savings," less than half of which have been realized in 2019. Further, management has identified an additional $40 million in annual savings, which will begin in 2020. Hub Group has reduced non-driver headcount by 9% since the end of 2018, reduced purchased transportation costs, improved driver and tractor utilization in its drayage operation, made technology investments and improvements in the dedicated division to generate these cost savings. Lastly, the company expects its technology program to provide another $20 million in profitability in 2022.

HUBG Stock Price Chart – SONAR: STOCK.HUBG

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