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CORE
NorthAmericaTransportation
ThoughtsonRelativeValuation INDUSTRYUPDATE
EquityResearch
20August2018
Withastrongeconomy,atleastinNorthAmerica,transportresultsin2018havegenerallybeenfavorableandsupportiveofahigherearningsoutlook.However,validmarketconcernssurroundingtradehaveclearlydrivenwinnersandloserswithinthegroup.Wetakeaquicklookatrelativevaluationswithafocusonrailroads.Transportfundamentalsremainnearlyunanimouslyfavorablethissummer,suggestingacontinuationofsolidcyclicaloutcomesheadingintothebackhalfof2018.However,globaltradedisputeshavemarketsconcernedthatthecurrentperiodofmacroexpansioncouldbeshortlived.Withintransports,wethinkthisdisconnectcreatesopportunityforinvestors,especiallyiflessacrimonioustradeoutcomescanbeachieved.Railroadequitieshaveclearlybenefitedthisyear,outperformingtheS&P500andindustrialXLIindexby10%and16%respectively.However,integratoranddomestictruckingequitiessuchasFedExandKnighthavemateriallyunderperformedboththemarketandbroaderindustrials(seepage3fordetails).
Despitelargelyfavorabletransportestimaterevisions(ex-airlines),mostnon-railstockshaveunderperformedasvaluationscompress.Thisyearhasbeenadichotomyforourtransportcoverage:railsandasset-lightstocks,historicallyviewedasrelativelydefensive,haveperformedwellasinvestorsconcernssurroundingcycle‘peak’havegrown,withbothtruckingandintegratorslagging.However,withestimatescomingupacrossthesector,supportedbystrongdomesticfundamentalsandoptimisticmanagementcommentary,wethinkthereisplentyofupsideforacrossourtransportuniverse,especiallyifthereisresolutiononcurrenttradeconflicts.
Railroadshavebeenarelativesanctuaryin2018,butsolidfundamentalsandhighcashyieldskeepusinterested.Firsthalf2018railearningsdemonstratedbroadlythatcarriers’areleveragingrobustdemandtogeneratestronggrowthandmarginimprovement.AndwhilesolidequityperformanceYTDleavesvaluationappearingfulleronanearningsbasis,ourviewofcontinuedstrongresultsandattractivecashyieldskeepusbullishonthegroup.
Outsideofcompany-specific2Q18results,XPO,EXPD,HUBGandFTAIlargelycontinuedthethemeofanoptimisticoutlookfortherestof2018andpositivecommentaryonearly2019.EventhoughXPOdidn’traisefullyearguidance,managementcontinuedtotalkupgrowthprospectsforthecorebusinessintheforeseeablefuturewhilethecompanypursuesanaccretivedeal.HubGroupbothbeatestimatesandraisedfullyearguidanceasmanagementtalkeduppeakseason,discussingthepotentialforbothastrongerandlongerpeakthatwilllikelyalsosupportearly2019results.FTAIreportedstrongresultsfromitsaviationleasingbusiness,andcontinuedtohighlightthelongtermpotentialfromitsinfrastructureinvestmentunit.Pleaseseepage8formoredetailedthoughtsoneachcompany.
NorthAmericaTransportation
POSITIVE
Unchanged
Forafulllistofourratings,pricetargetandearningschangesinthisreport,pleaseseetableonpage2.
NorthAmericaTransportationBrandonR.Oglenski
+12125268903
brandon.oglenski@
BCI,US
MatthewWisniewski,CPA
+12125265143
matthew.wisniewski@
BCI,US
MatthewPreston
+12125265752
matthew.preston@
BCI,US
BarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.
PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE18.
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SummaryofourRatings,PriceTargetsandEarningsChangesinthisReport(allchangesareshowninbold)
Company Rating Price Pr
iceTarget EPSFY1(E) EPSFY2(E)
OldNew17-Aug-18Old
New%ChgOldNew%ChgOldNew%Chg
NorthAmericaTransportation PosPos
ExpeditorsIntl.ofWashingtonInc.(EXPD)
OWOW
74.01
78.00
78.00
-
3.223.14
-2
3.553.45
-3
FortressTransportation&InfrastructureInvestorsLLC(FTAI)
OWOW
18.36
20.00
20.00
-
0.370.27
-27
0.520.37
-29
HubGroupInc.(HUBG)
UWUW
51.00
48.00
48.00
-
2.402.78
16
2.753.10
13
XPOLogisticsInc.(XPO)
OWOW
101.71
130.00
130.00
-
3.303.29
0
4.003.95
-1
Source:BarclaysResearch.SharepricesandtargetpricesareshownintheprimarylistingcurrencyandEPSestimatesareshowninthereportingcurrency.FY1(E):CurrentfiscalyearestimatesbyBarclaysResearch.FY2(E):NextfiscalyearestimatesbyBarclaysResearch.
StockRating:OW:Overweight;EW:EqualWeight;UW:Underweight;RS:RatingSuspendedIndustryView:Pos:Positive;Neu:Neutral;Neg:Negative
Transport&AirlinePerformanceandRevisions
Year-to-date,bothrailandasset-lightstockshaveoutperformedthemarket,likelygiventheirrelativelydefensivenatureandinvestorsgrowingconcernsaroundcyclepeak(Figure1).Supportingrailequitieshasbeendoubledigitestimaterevisions,likelypartiallydrivenfromdelayedtaxadjustments,andmultipleexpansion(moredetailinthenextsection),whilebroadlytransportshaveseenmultiplecontraction.Eventhoughtaxreformwasatailwindtoairlineestimates,risingfuelandotherheadwindshavedrivenasubduedoutlookforearnings(Figures2-3).
FIGURE1
Year-to-DateInvestorshaveRewardedRelativelyDefensiveStocks,SuchasRailsandAsset-lightLogisticsNames,WhiletheRestofourTransportCoverageandAirlineStockshaveLargelyUnderperformedtheXLIandS&P500…
Railroadshaveoutperformedthebroadermarketthisyear,alongwithlogistics;withtheremainderofourcoverageunderperformingboththemarketandXLI
Transport&AirlineRelativePerformanceYTD
120
115
110
105
100
95
90
85
80
(rels&p500;wkly;groupavg.)/1
US12%
CAN7%
Log.4%
XLI-6%
Int.-6%
Big"4"-10%
LFA-17%
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18
XLI Trucking U.S.Rails CANRails
Truck-19%
Integrators Logistics Big"4"Airlines LowFareAirlines
Note:/1U.S.railsincludeCSX,NSC,KSUandUNP;CANrailsincludeCNR.TOandCP.TO;TruckingincludesKNX,WERN,HTLDandSNDR;LogisticsincludesCHRW,EXPD,XPOandJBHT;IntegratorsincludesFDXandUPS;Big"4"includesAAL,DAL,LUV,UAL;LFAincludesALGT,ALK,JBLUandSAVE
Source:Thomson;BarclaysResearch:
FIGURE2
…SupportingRailStockOutperformancehasbeenDoubleDigitEstimateRevisions,LikelyBenefitingPartiallyfromTaxReformAdjustments…
15% 13%
10%
22%
StockPerformanceand2019EPSEstimateRevisionsYTD
(indexedtoJan'18;consensus2019eps)
13%
9%
0%
24%
13%
7%
-2%
-3%
-11%
-15%
Rails Logistics Integrators Bg"4"Airlines LowFareAirlines Trucking S&P500StockPerformance Est.Revisons
Note;/1IntegratorsincludeFDXandUPS;RailsincludeCN,CP,CSX,KSU,NSCandUNP;LogisticsincludesCHRW,EXPD,XPOandJBHT;TruckingincludesHTLD,
KNXandWERN;Big“4”includesAAL,DAL,LUVandUAL;LFAincludesALGT,ALK,JBLUandSAVESource:Thomson;BarclaysResearch
FIGURE3
...TaxReformandStrong1H18EarningsSupportingHigherEarningsOutlooksforTransportStocks,butMultiplesHaveCompressedBroadlyforNon-RailEquities.
Calendar2019ConsensusEPSEstimateRevisions
Revisions
Jan
Aug
Ch.
Integrators
FDX
16.66
18.85
13.2%
UPS
7.01
7.93
13.0%
Railroads
CNR.TO
6.08
6.22
2.3%
CP.TO
14.43
15.16
5.0%
CSX
3.11
4.01
29.0%
KSU
6.61
7.03
6.3%
NSC
7.79
10.01
28.5%
UNP
7.14
8.80
23.2%
Asset-light
CHRW
4.02
4.92
22.6%
EXPD
2.79
3.36
20.5%
XPO
3.53
4.32
22.6%
JBHT
5.26
6.39
21.5%
Trucking
HTLD
0.94
0.93
-0.6%
KNX
2.18
2.72
24.9%
WERN
1.84
2.50
36.1%
Big"4"Air
AAL
5.87
5.79
-1.4%
DAL
6.30
6.61
5.0%
LUV
4.97
5.04
1.5%
UAL
7.65
9.60
25.5%
LowFareAir
ALGT
12.05
12.17
0.9%
ALK
7.31
6.09
-16.8%
JBLU
1.99
1.82
-8.9%
SAVE
3.82
4.30
12.4%
P/EMultiple
Notes
Jan
Aug
Ch.
15.0x
13.1x
-1.9x
Transportearningsrevisionslkelybenefitingfromdelayedtaxadjustmentsinadditiontostrongfirsthalfresultsandoptimisticmanagementcommentary.
Outsideofrailequities,transportp/emultipleshavebroadlycompressed,especiallyfortruckingstocks,
withKNXnowtradingataneightturnlowermultiple.
Althoughtaxreformwasatailwindtoestimatesacrossourairlinecoverage,risingfuelandotherheadwindshaveweighedontheoutlookforearnings.
17.0x
15.4x
-1.6x
17.1x
18.7x
1.7x
15.9x
17.4x
1.5x
17.7x
18.4x
0.7x
15.9x
16.4x
0.5x
18.6x
17.4x
-1.2x
18.8x
17.0x
-1.8x
22.2x
19.7x
-2.5x
23.2x
22.0x
-1.2x
26.0x
23.5x
-2.4x
21.8x
19.1x
-2.7x
24.9x
21.3x
-3.6x
20.0x
12.1x
-8.0x
21.0x
14.7x
-6.4x
8.9x
6.5x
-2.3x
8.9x
8.4x
-0.5x
13.2x
11.8x
-1.3x
8.8x
8.5x
-0.3x
12.8x
11.2x
-1.7x
10.0x
10.7x
0.6x
11.2x
10.4x
-0.9x
11.7x
10.4x
-1.3x
Source:Thomson;BarclaysResearch
ALookatRailroadValuations
Althoughrailequityvaluationscurrentlyscreenabitfull,withUSrailstradingataslightpremiumonP/EandbothUSandCanadianequitiesaboveestimatedtaxadjustedEV/EBITDAlevels,cashflowyieldsremainattractive,especiallyforUSrailstocks(Figures4-7).
FIGURE4
USRailEquitiesareLargelyTradingabove5yrAverageRelativeP/EMultiple,WhileCanadianRailsareMostlyinLine…
NorthAmericaRailroadRelativeP/ERatiovs.S&P500
1.4x (NTM;basedonconsensus;a/o8/18/18)/1
1.2
1.0
0.8
0.6
Source:Thomson;BarclaysResearch
FIGURE5
…AfterAdjustingforTaxReform,WeEstimateUSandCanadianRailsAreCurrentlyTradingSlightlyAbove5yrAverageEV/EBITDAMultiples…
14.0x
NorthAmericaRailroadEV/EBITDAMultiples
(NTM;basedonconsensus;a/o8/18/18)/1
12.0
10.0
8.0
6.0
4.0
Note:/1UStaxadjustmentequals5yraveragemultipletimes1.24(1.05forCanadianrails),basedonestimatetaximpacttoearningsprofileofthebusinessSource:Thomson;CompanyReports;BarclaysResearch
FIGURE6
…ButValuationsAppearMoreAttractiveonCashYields,EspeciallyforUSRailEquities.
RailIndustryForwardActualFCFYield
7% (ntmact.;monthly;cfo-capex/mrktcap)
6
5
4
3
2
1
0
Source:Thomson;CompanyReports;BarclaysResearch
FIGURE7
MostofOurRailEquitiesRemainAttractivewithCashFlowYieldsAboveHistoricalAverages…
CurrentRailroadValuationsvs.HistoricalAverage
30x
(consensuntm;fcfyeldbarclaysest.ntm;5yravg.)/1
6%
25x
5%
20x
4%
15x
3%
10x
2%
5x
1%
0x
P/E EV/ Cash P/E EV/ Cash P/E EV/ Cash P/E EV/ Cash P/E
EV/
Cash P/E EV/ Cash
0%
EBITDAYeld EBITDAYeld EBITDAYield EBITDAYeld EBITDAYeld EBITDAYield(rhs) (rhs) (rhs) (rhs) (rhs) (rhs)
Note:/1EV/EBITDAmultipleadjustedforestimatedtaxreformSource:Thomson;CompanyReports;BarclaysResearch
XPO,EXPD,HUBGandFTAI2Q18Takeaways
Belowweprovideabriefsummaryofourthoughtsoneachcompanyfollowing2Q18earningsaswellasprovidekeyassumptionsaroundourupdatedmodels.
XPO2Q18Takeaways
Wherewestand:AswecontinuetowaitforthenextroundofM&A,whichmaybealittlelongerthanpreviouslythoughtgivenmanagement’sapparentwillingnesstowaituntil2019foradeal,theunderlyingbusinesscontinuestoperformwellwitharobusteconomicenvironmentsupportingstronggrowth.AlthoughwewereabitsurprisedgiventhetimingofthecurrentCFO’sdeparture,werespectMr.Hardig’swishestostepdownfromhiscurrentroletospendtimewithfamily.Andwhilethesearchbeginsforareplacement,weseeatalentedmanagementteamthatremainsfocusedongeneratingoutperformanceforshareholders.WeremainOverweightonXPOshares.
XPO2Q18mixed.AdjustedEPSof$0.98beatourandconsensusestimatesof$0.95and
$0.94,respectively.Comparedtoourmodel,strongerlogisticsnetrevenueoffsetsomeweaknessfromtransportation,butlowernetoperatingmarginresultedina5cEBITmiss.Belowthelineitems,includinghigherotherincome,lowerinterestexpenseandlowertaxrate,combinedtoadd9c.AdjustedEBITDAbeatby$7mm,or4c,partiallyduetohigherotherincome.
Weleaveestimateslargelyunchanged,butEPScomesdownasweincorporateanadditional6mmsharesfollowingsettlementoftheforwardsaleagreement.Pleaseseebelowkeymodelassumptionsforourfullyear2018Eand2019Eestimates:
Netrevenue:$8.3bn(14%yoy)&$8.8bn(6%yoy)
EBIT:$822mm(25%)&$980mm(19%)
AdjustedEBITDA:$1.6bn(guidanceofatleast$1.6bn)&$1.8bn(11%)
Netrevenuemargin:47.4%(47.1%in‘17)&47.5%
Netoperatingmargin:9.9%(9.1%)&11.1%
EPS:$3.29(69%)&$3.95(20%)
HubGroup2Q18Takeaways
Wherewestand:Ontopofreportingstrong2Q18results,managementannouncedtheplanneddivestitureoftheMODEagencybusinessasthecompanylooksfornewstrategicoptionstofurtherdiversifythebusinessandenhancereturns.Althoughweareincrementallymorepositive,duetostrongresultsandanoptimisticoutlook,wecontinuetoseegreaterinvestingopportunitieselsewhereintransportsgivenrecentreturnandcashchallengesatHubGroup(pleaseseeour‘HUBGBull&Bear--DebatingFreight2018’published20Apr18).
HUBGreportedstrong2Q18beat.ReportedEPSof66ccameinwellaboveour45candconsensus50cestimates.Comparedtoourmodel,strongergrossrevenuewasslightlyoffsetbyaweakernetrevenuemargin.Combinedwithahighernetoperatingmargin,EBITbeatby21c.Belowtheline,ahighertaxrateandsharecountoffsetapenny.
Wetakenumbersupfollowingstrong2H18guidancefrommanagement.Managementguidancefor13-18%top-linegrowthand12-13%netrevenuemargininthebackhalfoftheyearmorethanoffsethigherquarterlyoperatingcostguidancetotakeour3Qand4Qnumbershigher.Pleaseseebelowkeymodelassumptionsfor3Q18Eand4Q18Eestimates:
Grossrevenue:$1.2bn(16%yoy)&$1.2bn(6%yoy)
EBIT:$35mm(52%)&$43mm(27%)
Netrevenuemargin:12.1%(11.1%in3Q17)&13.0%(11.9%in4Q17)
NetOperatingmargin:23.4%(19.6%)&27.1%(24.9%)
EPS:$0.72(50%)&$0.92(50%)
FortressTransportation2Q18Takeaways
Wherewestand:DespiteastrongperformanceinFTAI’sleasingsegmentwithEBITDAuproughly50%in2Q18;resultscontinuedtobepressuredbytheinfrastructuresegment,whichforthemostpart,hasyettopositivelycontributetoearnings.However,weremainencouragedbystrongerenergymarketfundamentalsthatcoulddriveupsideforFTAI’sinfrastructureassets.Furthermore,givenarobustpipelineoffutureinfrastructureinvestmentsofmorethan$1.5bnthrough2020wecontinuetomodelthesegmentwillbegintomeaningfullycontributetoearningsinthenearfutureashighlightedinourrecentBull&Bearnote(See'FortressTransportation&InfrastructureLLC:Bull&Bear DebatingFreight2018',published8May2018).Withrecentresultsfinallysupportingthedividend,continuedperformanceintheleasingsegmentcombinedwithupsidepotentialininfrastructure,weremainoptimisticontheoutlookforFTAI.
EPSmissesbutFADaboveexpectations.FTAIreportedadjusted2Q18EPS3cbehindourestimateof13candconsensus11c.Comparedtoourmodel,loweroutcomesintheinfrastructuresegment,includingtheJeffersonterminal,ledtothemiss.However,fundsavailablefordistribution(FAD)cameinat$45mmforthequarter,betterthanourestimateof$11mm.
Wetweakestimateslower.Pleaseseekeymodelassumptionsforour3Q18EandFY18Eforecastsbelow:
Revenue:$82mm(35%yoy)&$326mm(50%yoy)
TotalEBITDA:$55mm(67%margin)&$226mm(70%margin)
LeasingSegmentEBITDA:$59mm(90%margin)&$232mm(90%margin)
InfrastructureEBITDA:-$2.4mm(-15%margin)&-$15mm(-22%margin)
FADpershare(FundsAvailableforDistribution):$0.31&$1.61
ExpeditorsInt’l2Q18Takeaways
Wherewestand:EventhoughEXPDearningsunderwhelmedlargelyonweakermargins,wesuspectitwaslikelyduetooptimisticairfreightmarginforecastsgivenrecentimprovementinastrongpricingenvironment.Andwhilewetemperfurthermarginimprovementinthenearterm,wenoterecentstrengthinthecompany’sEuropeanbusinessshouldsupportahealthygrowthoutlookbeyond2018.
EXPD2Q18underwhelms;lowertaxratebeats.ReportedEPSof$0.79was1caboveourandconsensusestimateof$0.78.However,comparedtoourmodel,EBITmissedledbyweakerthanexpectedmarginoutcomesintheairfreightandoceansegments.Belowtheline,alowertaxrateadded8candotheritemsaddedapenny.
Wetakenumbersdownaswelowermarginoutcomeexpectationsforthebalanceof2018,givenstrongairfreightpricingandseeminglychallengedoceanfreightmargins(Figures8-9).Pleaseseebelowkeymodelassumptionsforourfullyear2018Eand2019Eestimates:
Airfreightnetmargin:26.6%(26.1%in’17)&27.4%
Oceannetmargin:27.0%(26.7%)&27.7%
Cons.grossrevenue:$8.0bn(15.0%yoy)&$8.5bn(6.2%yoy)
EBIT:$781mm(11.6%)&$856mm(9.5%)
EPS:$3.14(27%)&$3.45(10%)
FIGURE8
WeaknessinContainerRatesCouldProveSupportiveofOceanFreightMargins,LendingPossibleUpsideto3Q18Estimates
EXPDOceanNetRevenueMarginsvs.CCFICompositeIndex
(annualch.;CCFIInverted)
-45%
-30%
-15%
0%
15%
30%
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
45%
900
CCFICompositeIndex(Inverted)
EXPDOceanNetRevenueMargin(rhs,bps)
OceanNRMweakerin2Qthanexpected,wemodelflatmarginsin3Q
EXPD'sOceannetrevenuemarginshaveconsistentlystrongnegativecorrelationwithspotcontainerrates
600
300
0
(300)
(600)
(900)
Source:CompanyReports;Clarkson’sresearch;BarclaysResearch
FIGURE9
StrongAirfreightPricingEnvironmentLikelytoChallengeFurtherMarginImprovementasRecentOutsizedMarginPerformanceWeakens…
-20%
-15%
-10%
-5%
0%
5%
10%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
15%
EXPDAirfreightNetRevenueMarginsvs.AirfreightPricing
(annualch.;DrewryInverted)
DrewryEast-WestAirfreightPriceIndex(Inverted)
EXPDAirfreightNetRevenueMargin(rhs,bps)
Preliminarilymodelsimilar
marginimprovementin3Q18
Recentmarginoutperformanceweakens
asstrongairfreightpricingresultedinbelowexpectedmarginoutcome...
Relationshipnotperfect,butEXPDairfreghtmarginstendtobenefitwhenmarketpricingdeclines
800
600
400
200
0
(200)
(400)
(600)
Source:Drewry;CompanyReports;BarclaysResearch
Incomestatement($mn)
Revenue
2017A
6,921
2018E
7,961
2019E
8,452
2020E
8,846
CAGR
8.5%
Price(17-Aug-2018)
PriceTarget
USD74.01
USD78.00
EBITDA(adj)
750
836
911
967
8.9%
WhyOverweight?Expeditors’non-assetglobal
EBIT(adj)
700
781
856
911
9.2%
forwardingmodelgeneratessomeofthebestreturns
Pre-taxincome(adj)
719
805
875
929
8.9%
withinthetransportsectorandarelativelyattractive
Netincome(adj)
450
557
589
626
11.6%
valuationmakesforacompellingupsidecase.
EPS(adj)($)
2.48
3.14
3.45
3.80
15.3%
Dilutedshares(mn)
181.6
177.7
171.0
164.7
-3.2%
Upsidecase USD85.00
DPS($)
0.83
0.89
0.97
1.06
8.4%
EXPDupsidecaseisestimatedassumingan
improvingfreightrateenvironmentdrivesgross
Marginandreturndata Average revenuemarginspreadswiderby1%,relativetoour
EBITDA(adj)margin(%)
10.8
10.5
10.8
10.9
10.8
currentestimates.Underthisscenario,wea
earningsmultipleswouldexpandmodestly.
EBIT(adj)margin(%)
10.1
9.8
10.1
10.3
10.1
ssume
Pre-tax(adj)margin(%)
10.4
10.1
10.4
10.5
10.3
Downsidecase
USD65.00
Net(adj)margin(%)
6.5
7.0
7.0
7.1
6.9
EXPDdownsidecaseisestimatedassumingaweaker
ROIC(%)
22.9
27.9
31.1
34.2
29.0
freightrateenvironmentdrivesgrossrevenuemargin
ROA(%)
15.2
17.8
18.5
19.3
17.7
spreadstocompressby1%,relativetoourcurrent
ROE(%)
23.4
28.7
31.7
34.8
29.7
estimates.Underthisscenario,weassumeearnings
Balancesheetandcashflow($mn)
CAGR
multipleswouldnarrowmodestly.
Tangiblefixedassets
525
512
517
517
-0.5%
Upside/Downsidescenarios
Intangiblefixedassets
8
8
8
8
0.0%
Cashandequivalents
1,051
988
977
956
-3.1%
Totalassets
3,117
3,140
3,216
3,254
1.4%
Shortandlong-termdebt
0
0
0
0
N/A
Otherlong-termliabilities
N/A
N/A
N/A
N/A
N/A
Totalliabilities
1,123
1,244
1,396
1,481
9.7%
Netdebt/(funds)
-1,051
-988
-977
-956
N/A
Shareholders'equity
1,994
1,896
1,821
1,774
-3.8%
Changeinworkingcapital
-51
41
69
26
N/A
Cashflowfromoperations
489
654
715
709
13.2%
Capitalexpenditure
-11
-50
-60
-56
N/A
Freecashflow
478
604
655
653
10.9%
Valuationandleveragemetrics
Average
P/E(adj)(x)
29.9
23.6
21.5
19.5
23.6
EV/sales(x)
1.8
1.5
1.4
1.4
1.5
EV/EBITDA(adj)(x)
16.2
14.6
13.4
12.7
14.2
EquityFCFyield(%)
3.6
4.6
5.2
5.4
4.7
P/BV(x)
6.7
6.9
7.0
6.9
6.9
Dividendyield(%)
1.1
1.2
1.3
1.4
1.3
Totaldebt/capital(%)
0.0
0.0
0.0
0.0
0.0
Source:Companydata,BarclaysResearchNote:FYEndDec
WevalueExpeditorsInternationalofWashingtonInc.(EXPD)sharesat$78,whichisbasedonanaverageof13.5x(was13x)EV/EBITDAand22.5x(was22x)P/Emultipleonour2019EBITDAforecastof$911(was$943mm)andour2019EPSforecastof$3.45(was
$3.55).
4.5
EBITDA(adj)margin(%) 3.9
profitabilityrelativetopeerskeepsusUnderweight.
NorthAmericaTransportation
IndustryView:POSITIVE
HubGroupInc.(HUBG)
StockRating:UNDERWEIGHT
Incomestatement($mn)
2017A
2018E
2019E
2020E
CAGR
Price(17-Aug-2018)
USD51.00
Revenue
4,033
4,733
5,066
5,421
10.4%
PriceTarget
USD48.00
EBITDA(adj)
159
212
232
249
16.0%
WhyUnderweight?HubGroup’slargeintermodal
EBIT(adj)
97
133
147
158
17.6%
businessprovidesthecompanyfavorableexposureto
Pre-taxincome(adj)
91
124
139
148
17.4%
structuralexpansioninthecontinuedhighwaytorail
Netincome(adj)
60
93
104
111
22.7%
freightconversionmarket.However,lower
EPS(adj)($)
1.80
2.78
3.10
3.30
22.4%
Dilutedshares(mn)
33.3
33.5
33.6
33.6
0.2%
DPS($)
0.00
0.00
0.00
0.00
N/A
Marginandreturndata
Average
Upsidecase USD58.00
HUBGupsidecaseisestimatedassuminganimprovingfreightrateenvironmentdrivesgross
4.6 4.6 4.4
EBIT(adj)margin(%)
2.4
2.8
2.9
2.9
earningsmultipleswouldexpandmodestly.
Pre-tax(adj)margin(%)
2.3
2.6
2.7
2.7
2.6
revenuemarginspreadswiderby1%,relativetoourcurrentestimates.Underthisscenario,weassume
Net(adj)margin(%) 1.5
2.0
2.1 2.0 1.9 Downsidecase USD42.00
ROIC(%)
6.8
8.9
9.0
8.7
8.3
HUBGdownsidecaseisestimatedassumingaweaker
ROA(%)
4.0
5.3
5.4
5.3
5.0
freightrateenvironmentdrivesgrossrevenuemargin
ROE(%)
8.6
11.4
11.3
10.8
10.5
spreadstocompressby1%,relativetoourcurrent
Balancesheetandcashflow($mn)
CAGR
estimates.Underthisscenario,weassumeearningsmultipleswouldnarrowmodestly.
Tangiblefixedassets
562
718
803
892
16.7%
Intangiblefixedassets
423
420
420
420
-0.3%
Upside/Downsidescenarios
Cashandequivalents
29
25
32
61
29.1%
Totalassets
1,671
1,863
2,007
2,177
9.2%
Shortandlong-termdebt
303
315
315
335
3.5%
Otherlong-termliabilities
N/A
N/A
N/A
N/A
N/A
Totalliabilities
901
997
1,037
1,096
6.8%
Netdebt/(funds)
274
290
283
274
0.0%
Shareholders'equity
770
866
970
1,081
12.0%
Changeinworkingcapital
-72
24
-12
-12
N/A
Cashflowfromoperations
125
196
177
189
14.8%
Capitalexpenditure
-75
-209
-170
-180
N/A
Freecashflow
51
-13
7
9
-42.9%
Valuationandleveragemetrics
Average
P/E(adj)(x)
28.3
18.4
16.4
15.4
19.6
EV/sales(x)
0.5
0.4
0.4
0.4
0.4
EV/EBITDA(adj)(x)
12.5
9.4
8.6
8.0
9.6
EquityFCFyield(%)
3.0
-0.8
0.4
0.6
0.8
P/BV(x)
2.2
2.0
1.8
1.6
1.9
Dividendyield(%)
0.0
0.0
0.0
0.0
0.0
Totaldebt/capital(%)
28.2
26.7
24.5
23.7
25.8
Source:Companydata,BarclaysResearch
Note:FYEndDec
WevalueHubGroupInc.(HUBG)sharesat$48,whichisbasedonanaverageof8.0x(was9.0x)EV/EBITDAand15x(was17x)P/Emultiplesonour2019EBITDAforecastof$232
Revenue
15,381
17,498
18,554
19,564
8.3%
PriceTarget USD130.00
EBITDA(adj)
1,367
1,598
1,779
2,004
13.6%
WhyOverweight?XPOprovidesinvestorsanearly
EBIT(adj)
660
822
980
1,178
21.3%
entrypointinacompanywithmuchlargerambitions.
Pre-taxincome(adj)
425
679
834
1,060
35.6%
Robustorganicgrowthintruckbrokerage,lastmile
Netincome(adj)
249
448
553
715
42.2%
andcontractlogisticscombinewithanaggressive
Incomestatement($mn) 2017A 2018E 2019E 2020E CAGR Price(17-Aug-2018) USD101.71
EPS(adj)($)
1.94
3.29
3.95
5.10
37.9%
Dilutedshares(mn)
139.4
148.0
148.0
148.0
2.0%
DPS($)
0.00
0.00
0.00
0.00
N/A
Marginandreturndata
Average
EBITDA(adj)margin(%)
8.9
9.1
9.6
10.2
9.5
EBIT(adj)margin(%)
4.3
4.7
5.3
6.0
5.1
acquisitionstrategythathasthepotentialtodrivematerialvaluecreationforshareholders.
Upsidecase USD140.00
Pre-tax(adj)margin(%)
2.8
3.9
4.5
5.4
4.1
expandmodestly.
Net(adj)margin(%)
1.6
2.6
3.0
3.7
2.7
ROIC(%)
5.6
7.3
8.5
10.2
7.9
Downsidecase USD85.00
ROA(%)
2.0
3.5
4.2
5.3
3.7
XPO'sdownsidecaseassumesaweakerfreightrate
ROE(%)
7.1
10.2
10.9
12.3
10.1
environment,drivinggrossrevenuemarginspreadsto
compressby1%,relativetoourcurrentestimates.
Balancesheetandcashflow($mn)
CAGR
Underthisscenario,weassumeearningsmultiples
Tangiblefixedassets
N/A
N/A
N/A
N/A
N/A
wouldremainunchanged.
Intangiblefixedassets
5,999
5,846
5,846
5,846
-0.9%
Cashandequivalents
397
768
988
1,198
44.5%
Upside/Downsidescenarios
Totalassets
12,602
13,126
13,455
13,757
3.0%
Shortandlong-termdebt
4,521
4,041
3,441
2,641
-16.4%
Otherlong-termliabilities
N/A
N/A
N/A
N/A
N/A
Totalliabilities
8,592
8,362
8,056
7,550
-4.2%
Netdebt/(funds)
4,124
3,273
2,453
1,443
-29.5%
Shareholders'equity
4,010
4,764
5,399
6,207
15.7%
Changeinworkingcapital
-220
-212
-74
-74
N/A
Cashflowfromoperations
799
1,005
1,303
1,513
23.7%
Capitalexpenditure
-504
-518
-480
-500
N/A
Freecashflow
374
549
823
1,013
39.4%
Valuationandleveragemetrics
Average
P/E(adj)(x)
52.3
30.9
25.8
19.9
32.2
EV/sales(x)
1.2
1.0
0.9
0.8
1.0
EV/EBITDA(adj)(x)
14.0
11.5
9.8
8.2
10.9
EquityFCFyield(%)
2.6
3.6
5.5
6.7
4.6
P/BV(x)
3.5
3.2
2.8
2.4
3.0
Divid
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