Hub Group (NASDAQ: HUBG)
QVI Research Report | Initial Coverage | May 2023
Summary
Despite recessionary fears for the industry, Hub Group, the #2 intermodal marketing company in the freight transportation and logistics services space, has an upside.
The stock has outperformed its industrials sector, the small-cap universe, and the broader large-cap market in total returns during the three-year pandemic and bear market.
Fundamentals are adequate but improving, and yields and valuation multiples suggest a steep discount in the stock price.
Downside risks are below average, and near-sighted fears create opportunities for longer-view value investors.
Hub Group is among the market’s few quality bargains, earning this Quality Value Investing initial research report on the company and its common shares.
Premium (paying) subscribers: When referencing this research report, access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on May 2, 2023, and intended for illustration only.
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Hub Group Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Hub Group, Inc. (NASDAQ: HUBG) is a non-dividend-paying small-cap stock in the industrials sector’s air freight and logistics industry. HUBG was added to the QVI Expanded Portfolio on May 2, 2023, with a buy rating and a $75.34 cost basis per share.
Hub Group, a supply chain solutions provider, offers transportation and logistics management services in North America.
The company’s transportation services include intermodal, truckload, less-than-truckload, flatbed, temperature-controlled, and dedicated and regional trucking, as well as final mile, railcar, small parcel, and international transportation. Its logistics services comprise full outsource logistics solution, transportation management, freight consolidation, warehousing and fulfillment, final mile delivery, and parcel and international services.
Hub Group also provides dry van, expedited, less-than-truckload, refrigerated, and flatbed truck brokerage services. It offers a fleet of approximately 2,300 tractors, 750 independent owner-operators, and 4,600 trailers to its customers, as well as the management and infrastructure. The company serves a range of industries, including retail, consumer products, and durable goods. As of December 31, 2022, it owned approximately 48,000 dry, 53-foot containers, as well as 750 refrigerated, 53-foot containers; and leased approximately 225 dry, 53-foot containers.
Hub Group, Inc. was founded in 1971 and is headquartered in Oak Brook, Illinois, USA.
QVI’s value proposition elevator pitch for Hub Group:
Despite near-term recessionary fears and the potential effects on the trucking industry, Hub Group, the #2 intermodal marketing company in the freight transportation and logistics services space, has plenty of opportunity for growth over the longer term.
Performance vs. Sector and Market
The chart below illustrates HUBG’s performance against the Industrial Select Sector SPDR® Fund ETF (NYSE: XLI), iShares Russell 2000 ETF (NYSEARCA: IWM), and the SPDR® S&P 500 ETF Trust (NYSE: SPY) for the trailing three years including the coronavirus pandemic and inflationary bear market.
For example, HUBG has outperformed the industrials sector, its small-cap universe, and the broader large-cap market in total returns during the three-year coverage timeframe, including by +3,383 basis points [bps] over its small-cap peers.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Hub Group, Inc.’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Hub Group, Inc.: Bullish.
HUBG Total Returns vs. XLI, IWM, and SPY
Hub Group Inc (HUBG) Total Return: 79.33%
Industrial Select Sector SPDR ETF (XLI) TR: 69.23%
iShares Russell 2000 ETF (IWM) Total Return: 45.50%
SPDR S&P 500 ETF Trust (SPY) Total Return: 53.86%
Three-Year Trailing (as of May 2, 2023)HUBG Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
HUBG’s earnings yield traded well above the QVI targeted floor at 13.19%, as demonstrated in the below chart. In addition, at 10.06%, HUBG’s free cash flow yield also traded above the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that HUBG trades at a steep discount. QVI will further explore valuation multiples later in this report.
Dividend Yield
Hub Group, Inc. does not pay a dividend.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.43% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for HUBG was 7.75% or +432 bps above the 10-Year Treasury yield.
QVI’s shareholder yields rating for HUBG: Bullish.
HUBG Shareholder Yields
Hub Group Inc (HUBG) Price: $75.36
Hub Group Inc (HUBG) Earnings Yield: 13.19%
Hub Group Inc (HUBG) Free Cash Flow Yield: 10.06%
Hub Group Inc (HUBG) Dividend Yield: 0.00%
One-Year Trailing (as of May 2, 2023)Hub Group Fundamentals
QVI Research Report's fundamentals section measures the performance strength of the company's senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, Hub Group, Inc. had positive double-digit three-year annualized revenue growth of 13.34%, in line with the 13.73% median growth of the industrials sector.
Farther down the income statement, Hub Group had a trailing three-year low single-digit net profit margin of 3.42%, underperforming the sector's median net margin of 6.66%. However, Hub Group's most recent 12-month trailing net margin had improved to a sector competitive 6.38%.
Returns on Equity and Invested Capital
Hub Group, Inc.'s management produced a trailing three-year return on equity or ROE of 11.60%, below the targeted threshold but in line with the sector's median ROE of 13.98%. Again showing signs of improvement, HUBG's ROE was 21.47% during the trailing 12 months.
Stock buyback programs often elevate ROE. For example, in October 2022, Hub Group's board of directors authorized a stock repurchase program for $200 million of its shares.
At 9.60%, Hub Group's three-year return on invested capital, or ROIC, is below the QVI threshold but outperforms the sector's median ROIC of 7.05%, indicating that its senior executives are above-average capital allocators.
However, Hub Group's ROIC minimally covers its weighted average cost of capital, or WACC, of 7.55%. (Source of WACC: GuruFocus).
Despite low-to-mid-single-digit profit margins, the double-digit positive revenue growth, improving returns on equity, and sector-beating returns on invested capital suggest that Hub Group's management continues its five decades history of solid management performance in Chicagoland.
QVI's fundamentals rating for Hub Group: Bullish.
HUBG Returns on Management
Hub Group Inc (HUBG) Revenue (3 yr CAGR): 13.34%
Hub Group Inc (HUBG) Profit Margin (3y Median): 3.42%
Hub Group Inc (HUBG) ROE (3y Median): 11.60%
Hub Group Inc (HUBG) ROIC (3 yr Median): 9.60%
Three-Year Trailing (as of May 2, 2023)HUBG Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Hub Group, Inc. (HUBG), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial positions through direct ownership of any stocks mentioned in this report. I wrote this post myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their independent research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. David and his wife, Suzan, reside in historic South Central Pennsylvania, USA.
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