Hub Group: Why I Am Cutting My Stock Price Target By 10% (NASDAQ:HUBG)

While there is a freight recession that has significantly affected the financial results of freight and logistics providers, there are some companies that I believe hold compelling upside. Hub Group (NASDAQ:HUBG) is such a name. In May 2024, I initiated coverage for Hub Group with a buy rating and while the outperformance is not spectacular by any means, the stock returned 6.2% compared to a 5.4% for the broader markets. In this report, I will be discussing the most recent earnings which continue to show a challenging demand environment, and I will discuss the revised guidance. Furthermore, I will be updating the price target and rating for Hub Group.

Hub Group Earnings Continue To Be Pressured

The second quarter revenues continued to show decline with a total sales decline of 5% to $986.5 million compared with the same quarter in 2023. Intermodal and Transportation Solutions sales declined 9% to $561 million driven by lower fuel revenues partially offset by higher volumes. Logistics revenues increased 1% to $459 million reflecting the addition of the Final Mile business results partially which offset the 13% decline in brokerage revenues reflecting lower pricing and volume as well as a less favourable mix.

Operating expenses declined by roughly 3% to $947 million driven by Purchased Transportation and Warehousing cost declining almost 5% driven by lower rail costs and external carrier costs. Salaries increased by 2.3% reflecting the acquisition of the Final Mile partially offset by lower headcount in the other parts of the business. Depreciation and amortization increased by 6.7% as the acquisition of the Final Mile business gave Hub Group a higher asset base to depreciate against. Insurance costs rose 8.3% while general expenses grew 4.2% reflecting the Final Mile added costs.

Operating income declined from $61.1 million to $37.6 million or a 36% decline, indicating operating margins contracting from 6% to 4%. Freight businesses are currently seeing significant margin contraction as the operational environment remains tough and during the pandemic there was cost inefficient growth. Transportation companies are now trying to better control the costs and identify some bright spots in the business. For Hub Group, that seems to be the less-than-truckload or LTL business, which continues winning new contracts and saw volumes grow by 18%.

Hub Group Revises Financial Guidance Downward

A continued risk for companies such as Hub Group is that a firm recovery in demand could slide to the right. That is also why the company has revised its EPS guidance downward by $0.05 to a range between $1.75 and $2.05 on an unchanged revenue guidance of $4 billion to $4.3 billion. There could be some upward pressure on the guidance in case restocking activity is stronger than expected and intermodal demand is more in line with what is normally seen in the balance of the year. Another possible driver of upside is the opportunity to convert truckload transports to intermodal which would allow for better gross margins. However, the reality remains that the macroeconomic environment remains tough. What I do like about Hub Group is that its leverage is just 0.3x EBITDA with a net debt of only $94 million.

Hub Group Stock: Still A Buy But A Lower Price Target

To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions and the stock price targets accordingly. In a separate blog I have detailed our analysis methodology.

With the spot price pressure expected to persist throughout the year, the EBITDA estimate for 2024 has come down by 3.5% and the cut to analyst estimates on EBITDA in subsequent years has been even stronger as growth is also sliding. Total EBITDA between 2024 and 2026 is now expected to be 5% lower than initially anticipated. On free cash flow estimates, there was little movement. Just like many freight and logistics providers with growth absent, the growth CapEx is also being reduced. At current prices, Hub Group is fairly valued so there is no strong buy case, but the rating remains a buy. The reason for this is that for 2025 there still is 14% upside with a $51.95 price target, which is lower than the $57.50 price target I initially had for 2025. Towards 2026, the upside remains a solid 33% granted that spot price recovery and growth does not slide to the right even more.

Conclusion: Hub Group Navigates A Tough Freight Market

The second quarter results continued to show the challenges on the top line as spot prices remain pressured due to the current macroeconomic environment. The bright spots are that LTL is seeing solid contracting activity and the business is able to modestly reduce its cost balance. However, a clear risk of recovery and growth shifting to the right is an overhang for Hub Group that has driven the stock price target down by 10%. Nevertheless, I do maintain my buy rating as the company is able to reduce costs, eliminate growth CapEx as long as growth remains absent, and has a low leverage.

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