Hub Group (NASDAQ: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 account for nearly three-quarters of total revenues. The remainder of HUBG’s earnings comes from its truck brokerage (roughly 20%) and logistics (roughly 10%) segments. 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. 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. The company earned $1.5 billion in revenue and $34 million in net income in 2009.
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. 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.
Hub Group has three business segments:
This division ships customer cargo using a combination of rail and truck transport, typically over long distances of 750 miles or more. 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. Hub Group controls one of the largest container fleets in the industry, with 23,000 leased or rented containers. 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. Through its subsidiaries, Comtrak and Quality Services, HUBG also provides its own drayage services for intermodal clients.
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.
HUBG’s logistics division operates under the name of Unyson Logistics. Unyson offers such services as shipment optimization, load consolidation and carrier management.
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 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.
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.
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. In addition, the Environmental Protection Agency has posted guidelines for a progressive decrease in diesel truck emissions through 2010. These regulations increase the operating costs of the trucking companies HUBG contracts with.
The driver market is the tightest it has been in 20 years, with turnover rate exceeding 100% in some large trucking companies. According to the American Trucking Association, the long-haul segment of the trucking industry faces a national shortage of roughly 20,000 drivers. This shortage will increase trucking company costs as they struggle to attract and retain drivers, an expense that will be passed on to HUBG.
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).