Freight Markets Are Rolling Over, But Hub Group Is Well-Positioned Long Term

It's never easy to buy into a cyclical downturn, as cycles have a way of defying expectations for duration and depth. Moreover, Hub Group (NASDAQ:HUBG) hasn't really sold off all that much from its peak, despite the likelihood of weaker intermodal and brokerage pricing and some fall off in volumes as economic activity slows. I think there are good reasons Hub Group hasn't sold off much, though, as this is one of the best-run intermodal/logistics companies that I follow.

Hub Group shares are up about 40% since my last update, handily outperforming other stocks that I watch in the space, including C.H. Robinson (CHRW), J.B. Hunt (JBHT), Schneider (SNDR), and XPO (XPO). I do see some risk from the spread between longer-term sell-side analyst estimates and management's targets (the sell-side is higher), and likewise, I do see risk that the next 12-24 months could be tougher economically than currently expected, but it's hard not to like the longer-term value proposition here.

 

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Freight Markets Are Rolling Over, But Hub Group Is Well-Positioned Long Term

Hub Group Undervalued With An Improving Growth Outlook

Logistics infrastructure is under strain across the U.S. right now, but with challenges come opportunities, including the opportunity for Hub Group (HUBG) to lock in better prices, continue its productivity/efficiency initiatives, and reinvest in the growth of what is already the second-largest intermodal services provider.

Balancing growth and margins will always be a challenge for providers like Hub Group and J.B. Hunt (JBHT), but I like how the business has evolved over the last four years and I like management's moves to expand the business's footprint (including the recent addition of a well-regard asset-light last-mile logistics provider). With the shares looking undervalued below the mid-$60's, I think near-term worries about gross margin pressure have created a window of opportunity here.

 

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Hub Group Undervalued With An Improving Growth Outlook

XPO Logistics Leveraging A Hot Freight And Logistics Market

One of the pleasures of following XPO Logistics (XPO) has been listening to the various and sundry comment section prophets of doom call for XPO's imminent collapse - back at $30, $50, $75, and so on. There have most definitely been some big corrections along the way, but management has demonstrated that not only can it assemble a high-quality broad-ranging freight and logistics franchise but also run it well. A debt-rich balance sheet, economic sensitivity, and a desire for more deals are all risk factors to varying degrees, but XPO has carved out strong positions in areas like truck brokerage, forwarding, less-than-truckload (or LTL) trucking, last mile logistics, and contract logistics.

Valuation is a much more significant issue for me now, though. Even if XPO Logistics can grow at a pace similar to what companies like Old Dominion (ODFL), J.B. Hunt (JBHT), Hub Group (HUBG), and C.H. Robinson (CHRW) have managed and push FCF margins into the mid-single-digits, the implied returns aren't that impressive, and the shares are likewise not all that cheap on a forward EV/EBTIDA business compared to a blended multiple based upon its end-market exposures.

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XPO Logistics Leveraging A Hot Freight And Logistics Market

Radiant Logistics Applying A Familiar Model To A Fragmented, Growing Sector

The third-party logistics (or 3PL) industry is huge, with some estimates of the addressable opportunity ranging from $160 billion to $190 billion just in the United States. Radiant Logistics (NYSEMKT:RLGT) isn't targeting all of that, or at least not yet, but the company's operations in truck and intermodal brokerage and freight forwarding do cover around one-half to two-thirds of the potential market. Radiant is still a relatively small player in comparison to companies like C.H. Robinson (NASDAQ:CHRW), XPO (NYSEMKT:XPO), Landstar (NASDAQ:LSTR), and Echo (NASDAQ:ECHO), but the company's growth-by-acquisition strategy has been used successfully many times over in this space and its addressable markets remain very fragmented.

At this point, it looks to me like the Street may be too skeptical about Radiant. While there have been recent challenges from soft demand and excess capacity, those circumstances seem to be improving. Uncertainty about U.S. trade policy is another risk factor, as is the possibility that the company will overpay for future acquisitions and/or struggle to integrate them. Recognizing those risks, I still believe there are meaningful opportunities here as the business scales up, and I think the shares look pretty interesting below $6/share.

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Radiant Logistics Applying A Familiar Model To A Fragmented, Growing Sector

Hub Group Grabbing Share, But Backfilling The Margins Is Important

I can't fault for Hub Group's (NASDAQ:HUBG) growth strategy, as the company has used acquisitions and execution to build itself to mid-teens share of the domestic intermodal market and a top-five position in the domestic truck brokerage sector. I'm not worried about the growth potential in intermodal, as I think the market is only about 25% penetrated, but I would like to see the company make more progress on profitability as margins have slipped, free cash flow has become erratic, and recent trends in ROIC aren't so favorable.

I don't see anything unfixable about Hub Group, but the shares have enjoyed a good run since the election (up about one-third) and the valuation already seems to incorporate expectations for lower corporate taxes and increased economic activity. As is too often the case, then, this looks more like a "consider on a pullback" idea today, though I suppose more momentum-inclined investors may feel differently given the recent earnings report and the prospect of more clarity on pro-business policies from the new administration.

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Hub Group Grabbing Share, But Backfilling The Margins Is Important

Seeking Alpha: XPO Logistics Sticking To Its Guns

XPO Logistics (NYSE:XPO) is quite possibly one of the most controversial names I follow, with every article I write seemingly bringing more than its share of "I'll believe it if/when I see it" skepticism on the company's growth-by-acquisition plans. There is no doubt that management's strategy is exceptionally aggressive and the company has shifted (or perhaps broadened) its strategy from asset-light truck brokerage to a more comprehensive third-party logistics (or 3PL) portfolio.

There are good reasons to be skeptical of stories like XPO Logistics. Rampant M&A makes it harder to suss out the real underlying performance of the business and creates opportunities for accounting that runs from ambitious to aggressive to outright wrong. On the other hand, the shares are up more than 80% from when I first wrote on them and the 3PL sector not only offers good underlying growth but numerous consolidation opportunities. I won't dismiss the risk that this is a big game of musical chairs, but I know that Wall Street can't help itself when it comes to growth and XPO Logistics could have a great deal more of that in store in the coming years.

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XPO Logistics Sticking To Its Guns

Seeking Alpha: XPO Logistics' $7 Billion Revenue Ambition

It's almost surprising that XPO Logistics (XPO) hasn't made another major acquisition since I last wrote about the company in mid-January. I am of course being facetious, but not by much, as XPO management has shown an extreme willingness to identify, negotiate, and close deals that bring in new revenue and business opportunities to this fast-growing third-party logistics provider.

The investment thesis here still comes down to belief. If you believe that management will hit its goal of $7.5 billion in revenue and $425 million in EBITDA in 2017, these shares look quite cheap today, but ample risks remain regarding the company's ability to integrate acquisitions, manage the balance sheet, and drive those mid-single digit EBITDA margins. I don't have complete confidence that management will get there, but "close" is still good enough to make this a stock worth considering.

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XPO Logistics' $7 Billion Revenue Ambition

Seeking Alpha: XPO Logistics Building Credibility In Aggressive Growth Targets

When I last wrote about XPO Logistics (XPO) in March of this year, I found the company's ambitions to be rather remarkable, but potentially very lucrative for shareholders. In the following four or five months, I didn't really second-guess my decision to "watch and wait" as the stock went nowhere fast. Then the company announced its largest-ever acquisition and the stock jumped to new highs before settling down a bit.

Six months later, it's hard not to like XPO Logistics even more. The company's combination of aggressive M&A and organic growth is building credibility that the 2016 target of $4 billion to $6 billion in revenue is attainable, not to mention the 5% EBITDA margin. A great deal could still go wrong between now and then and there are significant uncertainties about what the company's capital structure will look like at that point, but I think shareholders can still find meaningful value in these shares.

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XPO Logistics Building Credibility In Aggressive Growth Targets

Investopedia: Intermodal Growth Continues To Push J.B. Hunt Higher

Sometimes it's tempting to just say “okay, valuation doesn't matter”, throw caution to the wind, and go into a growth story like J.B. Hunt (Nasdaq:JBHT). After all, with seemingly every quarter this company demonstrates why it's one of the leaders in the still-growing intermodal space. While the stock did lag the S&P 500 over the last quarter, it continues to enjoy rich multiples and ample support on the sell-side. Even though I really do like this company and wish I had bought the stock four years ago, I still can't resolve the valuation in light of the probable returns and cash flow that this business will produce.

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Investopedia: J.B. Hunt's Bigger Challenge Today Is Expectations, Not Operations

The markets remind us over and over again that quality stocks often appreciate well beyond fair value, particularly when they become popular picks in attractive sectors. That would seem to be the case at J.B. Hunt (Nasdaq:JBHT), as it is quite difficult to call the stock's price a bargain by conventional means. While the Street's love for J.B. Hunt has been great for shareholders, it does come with a price, as expectations seem to be quite high for this well-run transportation company.

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Seeking Alpha: XPO Logistics Has Huge Ambitions, But Wall Street Has Real Doubts

It doesn't feel like a stretch to say that Wall Street loves logistics. From FedEx (FDX) to Hub Group (HUBG), from Landstar (LSTR) to JB Hunt (JBHT), most of this sector is trading very close to 52-week highs, even though economic activity in the U.S. has been pretty "meh" recently. While CH Robinson (CHRW) and XPO Logistics (XPO) are a bit further removed from their highs, I think the latter could be a very interesting opportunity even at these levels.

The ambitions of the XPO management team are nothing short of extraordinary - they aim to take a company that sits around the #20 spot in the U.S. truck brokerage with $280 million in revenue and grow it into the #2 player by 2016, with revenue in the range of $4 billion to $6 billion. That's an incredible goal and frankly Wall Street isn't buying it - or at least not showing a willingness to assume that XPO can grow at that rate and generate any sort of real free cash flow. If the Street is wrong and management is right, shareholders could be looking at a future multi-bagger here.

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XPO Logistics Has Huge Ambitions, But Wall Street Has Real Doubts

Investopedia: Hub Group Could Deliver Value, But Mind The Margins

Done right, asset-light transportation/logistics services can be quite lucrative even if the reported free cash flow margins are thin. As one of the larger players in intermodal (and the largest asset-light intermodal company), Hub Group (Nasdaq:HUBG) is taking advantage of the same intermodal growth trends that have been helping rival J.B. Hunt (Nasdaq:JBHT) and boosting the performances of Class 1 railroads such as Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC). Although Hub Group is vulnerable to a further macroeconomic slowdown and a margin squeeze between rail carriers and customers, there could be worthwhile value in these shares.

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Investopedia: Investors Still Paying Up For J.B. Hunt's Uncommon Growth Prospects

Once again I find myself in a familiar place with J.B. Hunt (Nasdaq:JBHT). I like this growing intermodal services provider, and I do believe it's one of the most compelling organic growth stories in the transportation sector. On the other hand, I don't like how growth-starved investors have bid up the shares of this company to a level where I believe outperformance could prove difficult.

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Investopedia: Expectations, Not Performance, The Biggest Issue At J.B. Hunt

There's really not much a company can do when its stock takes on a popularity above and beyond rationality, as very few CEOs are going to come out and talk down their company's prospects. Nevertheless, fandom can create its own problems, and the popularity of J.B. Hunt (Nasdaq:JBHT) as an organic growth play in transportation and a great way to leverage the growth of intermodal traffic has resulted in high expectations and an arguably unsustainable valuation. Accordingly, I think there's a meaningful gap between how well the company actually performed in the second quarter and how the market has responded.

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Investopedia: J.B. Hunt Looking A Little Stretched

One of the trickiest parts of investing is figuring out that fine line between opportunism and greed. Take the case of J.B. Hunt (Nasdaq:JBHT). This transportation company is seeing excellent growth in its intermodal business, and intermodal transport is likely to be a strong multi-year growth story. On the other hand, expectations are already pretty steep and competition is sure to ramp up. That makes this a tricky hold, as results are likely to stay strong for a while, but today's valuation makes long-term underperformance more likely.
A Strong Start to the Year
J.B. Hunt definitely offered up a solid start to this year. Total revenue rose 17%, fueled by a 20% rise in the intermodal business. Truck revenue and dedicated service revenue were up much more modestly (8 and 7%, respectively), while the smaller Integrated Capacity Solutions business saw strong 30% growth but remains a relatively small operation.

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Investopedia: Pricing Is Strong At CSX

While rail traffic volumes were not very strong throughout much of the third quarter, there is more to railroad financial performance than just railcar volume. Pricing matters, and pricing has been strong at CSX (NYSE:CSX). Although there are more than a few points of concern around CSX's operating environment, the valuation here seems to assume a fairly bearish scenario. 

A Challenging Third Quarter  
While CSX reported revenue slightly above the average analyst estimate, investors should remember that estimates have been sliding for a few months as disappointing volume data, particularly in coal, has weighed on sentiment. Nevertheless, this was still a double-digit quarter as CSX produced 11% volume growth. Carload volume was up less than 1%, but the company reaped more than 10% additional revenue per carload. Of that, pure price increases (as opposed to fuel surcharge and/or mix shifts) were probably on the order of 6-7%.

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Investopedia: J.B. Hunt - Doing More With Less Trucking

It isn't a good sign for the truckload freight industry, when a company like J.B. Hunt (Nasdaq:JBHT) is doing better largely by getting away from the traditional trucking business, as fast as it can. While there will always be a place for trucking in the U.S. transportation system, this company is betting its future prosperity on less traditional operations, like intermodal and customized service offerings. 

Mixed Third Quarter Results  
J.B. Hunt's third quarter results were not bad, but they also were not as good as they may appear, at first look. Revenue rose 19%, with more than 40% of that growth coming from fuel surcharges. Growth was led by the intermodal segment (the company's largest), where revenue rose 24% on a 15% overall increase in load volume. The dedicated services and integrated solutions segments grew nicely, as well, with 16 and 21% growth, respectively. The truck segment was the laggard, growing just 2% on a reported basis, but actually shrinking 5% net of surcharges, on a 7% decline in tractors on the road.

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Investopedia: Rail Traffic Data Still Largely Good News

Another month has gone by, but the data concerning rail traffic in the U.S. is still positive. That, in turn, is another positive read for the economy overall, as well as industrial and material companies. And of course, let us not forget the rail companies - so long as rail traffic continues to climb, that is a tailwind for the sector as well. 

January's Data Mostly Positive 

For January of 2011, the Association of American Railroads reported that U.S. train carload traffic rose 8% from the year-ago level. The level of traffic seen in January also represented a 1.5% sequential increase from December's levels. Of the 20 categories tracked by the AAR, 15 saw carload growth in the month, with coal (always the biggest commodity for railroads) posting above-average growth of 8.8%. Grain traffic was also notably higher (up 10%), while sand, gravel, and aggregate shipments climbed 16%. The biggest laggards, waste/nonferrous scrap and nonmetallic minerals, were both down by double digits, but represent less than 3% of normal rail traffic anyway. (For more, see Rail Traffic Points To An Ongoing Recovery.)

Investors may want to pay attention to the "mostly positive" part of this news, though. For although U.S. rail traffic was again strong, U.S. intermodal traffic may be softening up. For January, intermodal traffic was up 7.4% on a year-on-year basis and 1.8% on a sequential basis. That is still quite good, but I believe this is the first quarter in quite some time where the year-on-year increase in rail traffic exceeded the increase in intermodal. It may mean nothing at all, or it may be a sign that international trade activity is lightening up a bit.

Also of note is the performance in Canada: Canadian traffic was down in January on an annual (-1.6%) and sequential (-5.9%) basis and although intermodal volumes were positive, they were not terribly strong. Seeing as how a lot of Canada's rail traffic is part of the "stuff trade" - mostly moving commodities to shipyards for export - this is worth watching as it pertains to commodity demand growth. If China and India are cutting down on the coal, lumber and metal they buy from Canada, that would not be positive for Canadian Pacific (NYSE:CPI) or Canadian National (NYSE:CNI), though both also have operators in the United States.

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Investopedia: Rail Traffic Has A Strong End To A Rebounding Year

December may generally be a slower month for transports, but the recovery in rail traffic continued on through the last month of 2010. This continues what has been a relatively strong rebound from mid-2009, though the recovery has only recaptured about half of the former level of weekly carload traffic. Not only is this encouraging news for rail investors who continue to hang on to these relatively strong stocks, but it should be encouraging to any investors weighted towards economic recovery/expansion plays.

The December Data Continues The Trend
According to the Association of American Railroads' monthly Rail Time Indicators, U.S. rail traffic was up 9.4% in December of 2010, relative to the prior year. If that sounds like a strong result, it is - the pace of annual improvement had been slowing a bit, but December's result represents some reacceleration above the full-year 2009 growth of 7.3%. Growth was likewise strong in the intermodal market, as traffic here increased 13.3% on an annual basis.

Putting the data into a bit more context, the recovery is strong but still has a ways to go. Although December traffic finally surmounted the 2008 level, it was because the data finally annualized the steep declines that began in late 2008. Relative to 2007 and 2006, traffic is still down about 10-15% on a weekly basis. (For more, see Core Stocks For 2011.)

Details Matter
While there is still a sizable gap between today's traffic levels and the "normal" levels of 2006-2008, there is at least one reason to be skeptical that a strong recovery in traffic can continue. Traffic levels in cargo closely tied to the housing boom - forest products (lumber) and aggregates (gravel, cement, etc.) - have not really recovered much (though they have rebounded off a bottom) and there are no signs pointing to a quick turnaround. On the other hand, rail traffic in categories like chemicals and grain are much closer to pre-recession levels. (For more, see Rail Traffic Points To An Ongoing Recovery.)

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Investopedia: The Logic Of Logistics Stocks

A great deal of ink is routinely spilled on the virtues of inventing a better mousetrap or finding a better way to make that mousetrap. It is less common, though, to see the same attention given to figuring out better ways to get those mousetraps onto store shelves. While most investors are likely quite familiar with the railroad and trucking industries, and their links with a recovering economy, the same may not be true for those companies that specialize in third-party logistics and serve as intermediaries between the producers and shippers.

To that end, then, it is worth exploring whether the logistics industry is a good investment destination in today's market.

The Industry
As a very simplified explanation, these companies thrive by stepping between shipping customers and shipping providers and making life easier for both. Handling the logistics and shipping can be a major headache for companies, particularly smaller operators, and shippers can charge punishing rates for deliveries that are inconvenient or inefficient for them. On the other hand, transportation companies really do not relish the headaches and hassles of dealing with thousands of customers and having to tend to their specific needs.

Enter the third-party logistics specialists. These companies can not only consolidate shipments and negotiate bulk discounts, but they can handle many of the details that bedevil smaller customers. On the flip side, they offer the large rail, trucking and freight concerns a large consistent customer with a thorough understanding of the business and a minimal need for hand-holding. Producers save money, transporters save money and the companies in between make money.

The Companies 
C H Robinson Worldwide (Nasdaq:CHRW) is the largest domestic truck broker in the U.S., and gets about three-quarters of its revenue from truck brokerage. The company is also looking to expand into the growing international air and ocean freight forwarding business. This should reduce some of the cyclicality of the business.

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