Hub Group (HUBG): Buy, Sell, or Hold Post Q3 Earnings?

Hub Group has had an impressive run over the past six months as its shares have beaten the S&P 500 by 15.9%. The stock now trades at $45.03, marking a 27.4% gain. This run-up might have investors contemplating their next move.

Is now the time to buy Hub Group, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Do We Think Hub Group Will Underperform?

Despite the momentum, we're cautious about Hub Group. Here are three reasons we avoid HUBG and a stock we'd rather own.

1. Weak Sales Volumes Indicate Waning Demand

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Air Freight and Logistics company because there’s a ceiling to what customers will pay.

Over the last two years, Hub Group’s units sold averaged 2.7% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Hub Group, its EPS declined by more than its revenue over the last two years, dropping 28%. This tells us the company struggled to adjust to shrinking demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Hub Group’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Hub Group doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 22.9× forward P/E (or $45.03 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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