Tippapatt
It was the summer of 2022 when Hub Group (NASDAQ:HUBG) was adding more hubs as it announced it next bolt-on deal after the company saw incredible operating momentum, something which clearly did not look to be sustainable.
A strong balance sheet and solid earnings power (even if margins would retreat from their peak) looked attractive. That margin reversal took place this year, with the annual guidance being cut in each quarterly report this year. Despite the margin reversal, shares have actually moved higher, making me less compelled to buy now, even after what appears to be a nice bolt-on deal.
On Hub Group
Hub Group has steadily expanded its business by offering comprehensive supply chain solutions to its leading customers, as the business has always invested into containers, trucks and technology, creating a platform which was well-equipped to absorb tuck-in acquisitions.
The business mostly relied on its intermodal solutions business, responsible for 60% of sales, complemented by two equally large logistics and truck brokerage businesses, which today combined are labelled the logistics group. Industry groups being served include retail, e-commerce and consumer products, among others.
A roughly $2 billion business in the early 2010s has essentially doubled to roughly $4 billion pre-pandemic, although that these are very competitive markets, with operating margins posted in the low single digits.
In the pandemic year of 2020 sales fell to $3.5 billion, with operating margins falling more than a point to 3.0% of sales, resulting in earnings being down about a dollar to $2 and change per share. The company initially guided for 2021 earnings to recover to $3 per share, as momentum was very strong coming out of the pandemic.
Early in 2022, the company reported even greater advancements with annual revenues reported at $4.2 billion, as operating profits of $238 million worked down to margins of 5.6% of sales, resulting in earnings of just over $5 per share, with the performance topping the original outlook.
For 2023, the company originally guided for sales around $5 billion, with earnings seen at a midpoint of $6.10 per share. After a very strong first half of the year, the company guided for annual sales to come in around $5.65 billion, but moreover saw earnings top $10 per share! This allowed the company to return to a net cash position, to therefore provide the resources to pursue tuck-on deals.
Even if earnings power of $10 per share might revert to normal levels, let's say at around $5 per share, the resulting 16 times multiple looked very reasonable, amidst an unleveraged balance sheet. Amidst all this, I was waiting for a pullback to the $70 mark, levels actually seen in the fall, but I never acted on my previous take.
Doing Well
A $80s stock at the start of this year rallied to the $100 mark in February, but shares sold off during the pullback in the fall, as shares have seen a relentless rally in recent weeks to current levels around $92.
Forwarding to February of this year, Hub Group posted 2022 revenues at $5.34 billion which came in a touch light versus the revised guidance, as earnings of $10.64 per share topped the guidance, while the business operated with a small net cash position.
The company guided for normalization, seeing 2023 sales between $5.2 and $5.4 billion, with earnings seen down to $7.00-$8.00 per share, after margins came in at 8.9% for all of 2022.
Despite the fact that earnings were seen down, a further pullback to the guidance was given following the release of the first quarter earnings report, with full year sales seen down to $4.6-$4.8 billion, and earnings seen between $6.00 and $7.00 per share.
The guidance was trimmed further, with sales seen between $4.3 and $4.5 billion upon the release of the second quarter results, with earnings seen between $5.80 and $6.40 per share. The guidance was cut again alongside the third quarter earnings report, with earnings now seen between $5.30 and $5.40 per share on a $4.2 billion revenue number.
Despite the fact that earnings have been cut in half - which I feared was realistic last year - shares have been holding up well, as earnings power of $5 and change translated into still a reasonable multiple with shares trading in the $70-$80s in the fall, while the company maintained a modest net cash position. This came as high single digit operating margins have fallen to margins around 4%, being in line with their long term average.
A Deal
While 2023 has been a tough year so far, the company announced a deal towards the end of the year. The company has reached a deal to acquire Forward Air Final Mile (FAFM) from peer Forward Air (FWRD) which has seen some turbulence as of late.
The company will pay $262 million for the final mile residential delivery activities, in a deal set to add $289 million in sales. The 0.9 times sales multiple being paid comes at a small premium compared to the 0.7 times sales multiple at which the company trades itself. Comforting to see is that the deal is expected to be immediately accretive to 2024 earnings, ahead of expected but meaningful cross-sell and operational synergies anticipated.
The deal adds about 6% to pro forma sales as a small net cash position will turn into modest net debt load, but still very manageable. It was this deal and some shareholder friendly actions initiated in the third quarter - including the initiation of a dividend which runs at $2 per share per annum, a 2-for-1 stock split announced, and a quarter of a billion buyback program, which have been fueling the rally in the shares in recent weeks.
And Now?
With Forward announcing a lot of actions to drive shareholder value here, I understand why investors are enthusiastic, but the full margin reversal in a year is quite substantial as well. Given all of his, I am keeping an eye on the business, with the full intention to initiate in the $70s, but feel no need to chase the shares at current levels in the lower nineties.
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