Hub Group Earnings: Intermodal Container Demand Remains Challenged, but No Surprises
Hub Group’s HUBG gross revenue fell to a 26% year-over-year decline, led by significant weakness in intermodal container demand, along with softer truck brokerage pricing. Revenue fell short of our expected run rate on greater-than-expected intermodal volume deterioration. Overall, however, the top-line pullback is not unexpected given retail sector inventory destocking and anemic import activity.
Hub’s flagship intermodal revenue, which the firm no longer discloses, was likely down in the second quarter, due in part to a 17% decline in volume, along with lower fuel surcharges and easing accessorial income. The story has flipped versus first-half 2022 when freight demand was incredibly robust but poor rail service and terminal congestion constrained volume growth. Now, rail service and network velocity have improved, but underlying demand is under pressure from elevated retailer inventory levels and falling rates in the competing truckload sector.
Hub’s operating margin deteriorated 390 basis points, to 6%, driven by lost leverage from lower intermodal volumes, reduced accessorial fees, and lower brokerage segment sell-rates to shippers. These factors were only partially offset by higher margins for dedicated truckload business and lower purchased transportation costs in truck brokerage. Total margin was roughly in line with our expected run rate.
We will likely temper our 2023 intermodal volume forecast, but we do not expect to materially alter our $83 DCF-derived fair value estimate.
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