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WIKI ANALYSIS
Hub Group (HUBG) is a transportation company that ships goods such as consumer products, automotive parts and retail merchandise. HUBG does not control its own transportation assets (i.e. trucks, railcars, planes) but contracts with third-party carriers like Burlington Northern and Union Pacific (UNP) to move goods. Hub Group buys container-hauling space in bulk from these carriers, and then sells the space to clients at rates cheaper than what they could negotiate independently. The company’s core business intermodal transportation (when goods are shipped using a combination of transportation modes, usually rail and truck), which accounted for 73% of total revenues in 2007[1]. The remainder of HUBG’s earnings comes from its truck brokerage (19%) and logistics (8%) segments[1]. Operating 21 facilities throughout the U.S. and Canada, Hub Group has become the largest intermodal marketing company in the country and one of the top five truck brokers[2]. Because of its size, HUBG has been able to establish close ties with major railroad suppliers and obtain favorable rates for the use of third-party services.
Intermodal shipping is generally cheaper (although also slower and less flexible) than trucking alone because railroads are about three times more fuel-efficient than long-haul trucks[3]. In the short term, rising fuel prices lead to greater demand for HUBG's intermodal services. Ironically, these same fuel prices present a challenge for the company's truck brokerage division which is already suffering from an ongoing industry wide shortage of truckers.
Business Financials
Hub Group has three business segments: intermodal (73% of revenue), truck brokerage (19%) and logistics (8%)[1]. Total revenue in 2007 amounted to $1.66B, reflecting a 3% increase over 2006 and growth across all segments[4].
Intermodal Segment (73% of revenue)
This division ships customer cargo using a combination of rail and truck transport, typically over long distances of 750 miles or more[2]. HUBG contracts with railroads to provide transportation for the long-haul portion of the shipment and with local trucking companies (known as “drayage companies”) for pickup and delivery[2]. Hub Group controls one of the largest container fleets in the industry, with 23,000 leased or rented containers in 2007[2]. The firm’s size helps HUBG maintain strong relationships with all of the major railroad suppliers, including Burlington Northern Santa Fe (BNI), Union Pacific (UNP), CSX, Norfolk Southern (NSC) and Canadian National [5]. Through its subsidiaries, Comtrak and Quality Services, HUBG also provides its own drayage services for intermodal clients. As of 2007, Comtrak and QS leased or owned 1058 tractor-trailers, employed 331 drivers and contracted with 845 independent drayage companies[2].
Truck Brokerage Segment (19% of revenue)
Hub Group’s truck brokerage unit contracts with independent trucking companies to negotiate rates, track shipments in transit and handle claims for freight loss and damage on behalf of its customers.
Logistics Segment (8% of revenue)
HUBG’s logistics division operates under the name of Unyson Logistics[6]. Unyson offers such services as shipment optimization, load consolidation and carrier management.
Trends and Forces
Hub Group’s Business is Susceptible to Economic Conditions
As a shipper of consumer products, retail merchandise and automotive parts among other things, HUBG relies on a healthy economy to keep goods moving about the country. By contracting with third-party carriers instead of buying its own transportation fleet, Hub Group is able to save money and adjust shipping capacity by controlling the number of third-party contracts that it enters. This shields it in part from fluctuations in consumer demand. However, a slowing economy and low consumer demand will cause a total volume drop in shipments that can hurt HUBG’s earnings.
HUBG’s Intermodal Operations Offer Hedge Against Increasing Fuel Prices
HUBG is relatively shielded from changes in fuel prices because the majority of its business comes from its intermodal operations, which are more fuel-efficient than trucking alone. In addition, like most of its competitors in the transportation industry, HUBG determines shipping rates by charging a base rate plus or minus a change in diesel prices. However, this fuel surcharge is not always fully and immediately transferable to the customer. And if diesel prices continue to increase, it may be harder for transportation companies to continue this practice. Since 2004, diesel prices have more than tripled from $1.50 per gallon to $4.72 per gallon in May 2008 [7].
HUBG Relies on Third-Party Carriers for its Business
As a non-asset based transportation firm, Hub Group has to secure third-party services for its business, and secure them at a favorable cost. Because it has developed networks of sufficient size and maintained close relationships with the major railroads, HUBG has so far been able to obtain profitable rates from its suppliers. A disruption of these relationships or a decline in the volume of shipments will jeopardize HUBG’s ability to secure third-party carriers at an advantageous cost.
Hub Group is Subject to Government Trade Policy and Regulation
The transportation industry is subject to a number of state and federal rules on issues such as insurance requirements, environmental standards, safety requirements, etc. Although the intermodal segment has essentially been deregulated, HUBG’s trucking operations are regulated by the U.S. Department of Transportation (DOT). In 2004, the DOT reduced the amount of time that drivers can spend behind the wheel[8]. In addition, the Environmental Protection Agency has posted guidelines for a progressive decrease in diesel truck emissions through 2010[9]. These regulations increase the operating costs of the trucking companies HUBG contracts with.
HUBG Faces Labor Supply Risks in the Trucking Industry
The driver market is the tightest it has been in 20 years, with turnover rate exceeding 100% in some large trucking companies[10]. According to the American Trucking Association, the long-haul segment of the trucking industry faced a national shortage of 20,000 drivers in 2007, a number that will swell to 111,000 by 2014[10]. This shortage will increase trucking company costs as they struggle to attract and retain drivers, an expense that will be passed on to HUBG.
Competition
Hub Group’s intermodal division competes chiefly with railroads and other intermodal service providers. Peer competitors in this category include Union Pacific (UNP), CSX Intermodal, J.B. Hunt Transport Services (JBHT), and Pacer International (PACR). The firm’s truck brokerage unit competes primarily against asset-based transportation firms like Conway Inc (CNW) and YRC Worldwide (YRCW), and non-asset based transportation firms like C.H. Robinson Worldwide (CHRW).
| Company | Revenue (millions USD) | Net Income (millions USD) | 1-Yr Sales Growth | Operating Margin | # of Containers |
|---|---|---|---|---|---|
| Hub Group | $1,658[4] | $60[4] | 3.0%[4] | 5.5%[4] | 23,000[2] |
| J.B. Hunt Transport Services (JBHT) | $3,490[11] | $213[11] | 4.9%[11] | 10.6%[11] | 34,019[12] |
| Pacer International (PACR) | $1,969[13] | $54[13] | 4.3%[13] | 4.8%[13] | 28,025[14] |
| C.H. Robinson Worldwide (CHRW) | $7,316[15] | $324[15] | 11.6%[15] | 7.0%[15] | |
| Union Pacific (UNP) | $16,283[16] | $1,855[16] | 4.5%[16] | 20.7%[16] | |
| CSX | $10,030[17] | $1,226[17] | 4.9%[17] | 22.5%[17] | 12,503[18] |
| Burlington Northern Santa Fe (BNI) | $15,802[19] | $1,829[19] | 5.5%[19] | 22.1%[19] | 3,253[20] |
Market Share
The following chart shows 2006 domestic rail intermodal market share by gross revenue. Total gross revenue in that year was ~$6B for the industry as a whole [21]. As the graph shows, the major railroads dominate the domestic rail intermodal market. However, many of the railroads actually rely on non-asset based transportation firms like Hub Group for their intermodal business because these third-party firms can offer large, consolidated shipping volumes.
References
- ↑ 1.0 1.1 1.2 1.3 HUBG 2007 10-K pg. 15
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 HUBG 2007 10-K pg. 1
- ↑ Market Watch: Railroad Fuel Efficiency Sets New Record. Retrieved on June 27, 2008.
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 HUBG 2007 10-K pg. 13
- ↑ HUBG 2007 10-K pg. 3
- ↑ HUBG 2007 10-K pg. 2
- ↑ U.S. Energy Information Administration: U.S. No.2 Diesel Retail Sales By All Sellers. Retrieved on June 27, 2008.
- ↑ U.S. Department of Labor: Truck Drivers and Driver/Sales Workers. Retrieved on July 2, 2008.
- ↑ DieselNet: Emissions Standards. Retrieved on July 2, 2008.
- ↑ 10.0 10.1 ERE.net: Truck Driver Slowdown. Retrieved on July 2, 2008.
- ↑ 11.0 11.1 11.2 11.3 JBHT 2007 10-K pg. 15
- ↑ JBHT 2007 10-K pg. 5
- ↑ 13.0 13.1 13.2 13.3 PACR 2007 10-K pg. 35
- ↑ PACR 2007 10-K pg. 6
- ↑ 15.0 15.1 15.2 15.3 CHRW 2007 10-K pg. 23
- ↑ 16.0 16.1 16.2 16.3 UNP 2007 10-K pg. 19
- ↑ 17.0 17.1 17.2 17.3 CSX 2007 10-K pg. 24
- ↑ CSX 2007 10-K pg. 16
- ↑ 19.0 19.1 19.2 19.3 BNI 2007 10-K pg. 13
- ↑ BNI 2007 10-K pg. 5
- ↑ 21.0 21.1 Merge Global: The New Supply Chain. Retrieved on June 27, 2008.
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