Intermodal marketing company Hub Group (NASDAQ: HUBG) sees thin inventories and tight truck capacity as supportive of volume and rate growth in 2021.
The OakBrook, Illinois-based company reported third-quarter earnings per share of 74 cents, 11 cents per share higher than the consensus estimate but 4 cents lower than the 2019 third quarter, which included more than $6 million in legal settlements.
On the Thursday evening conference call with analysts, management said most of their customers have depleted inventories and the continual restocking should drive intermodal volumes up in the high-single-digit range during the fourth quarter.
Total intermodal traffic on the railroads was up 9% year-over-year on average over the past four weeks, according to the Association of American Railroads.
Hub Group reported a 9% year-over-year increase in intermodal volumes during the third quarter, well ahead of container movements on the U.S. Class I railroads, which were 2% higher. Hub Group’s transcontinental and local West shipments increased in the mid- to high-double-digit ranges.
The company’s Eastern rail partner, Norfolk Southern (NYSE: NSC), reported a modest year-over-year decline, with the company’s Western partner, Union Pacific (NYSE: UNP), reporting a 6% increase.
However, “lower customer pricing” resulted in only a 4% year-over-year increase in intermodal revenue at $560 million, still a $100 million improvement from the second quarter. Higher purchased transportation and container repositioning expenses along with the lower rates pushed the division’s gross margin lower.
Management said intermodal pricing has reached a trough and should continue to rise in 2021, producing a “strong” bid season. The company has only 5% of its intermodal contracts renewing in the fourth quarter, but 45% will be repriced in the first quarter. Asked if they could recoup the 200 basis points of intermodal gross margin lost in 2020, management said that was the expectation.
Logistics revenue declined 7% year-over-year to $176 million, which was the result of losing some accounts earlier in the year. Truck brokerage revenue increased 10% to $120 million even as loads declined 10% in the period. Gross margin fell in both divisions as purchased transportation costs rose. Contractual revenue accounted for 64% of total brokerage revenue, down from 80% in the year-ago period.
Consolidated gross margin sank 310 basis points to 11.7%, with the operating margin declining 40 basis points to 3.7%. The company did achieve this year’s goal of $40 million in annualized cost savings.
Management reiterated the longer-term operating margin target of 5% but said a stronger-than-anticipated pricing cycle would be required to reach that level. They said they were “not optimistic” that it would happen in 2021 as the goal may take a couple of rate cycles to achieve.
The company has guided all non-intermodal segments to report sequential revenue declines in the fourth quarter.
Hub Group ended the quarter with $185 million in cash and equivalents. Capital expenditures totaled $6 million in the third quarter, but the company plans to spend $70 million to $75 million in the fourth quarter on growth initiatives. Hub Group will purchase a total of 3,300 containers and more than 300 tractors during 2020.
Management said they plan to use capital to pursue acquisitions and invest in the network versus executing share repurchases or paying dividends.
