Tuesday, August 22, 2006

Calls of Note Part 3

- BB&T Capital Markets is positive on Hub Group (NASDAQ:HUBG) after hosting a field trip to HUBG's corporate headquarters in Downer's Grove, IL. Overall, they had a positive meeting with management and came away feeling much more comfortable with regards to both intermodal volume growth as well as the company's need to increase asset ownership. Firm is confident that HUBG continues to have substantial margin improvement opportunities, particularly over the next 4--8 quarters. Finally, they are optimistic regarding the outlook for growth at the company's truck brokerage and drayage divisions.

Firm notes they look for growth in truck brokerage and drayage, continued strong pricing in the company's core intermodal product and strict cost controls to drive double digit EPS growth over the next 2--3 years.

They believe that margin improvement will be driven by: 1) growth in its more profitable truck brokerage business, 2) growth in its more profitable drayage business and in the percentage of its total drayage moves that are handled internally, and 3) continued strict cost controls.

Firm thinks intermodal volume growth will likely remain sluggish. This is due to four
factors: 1) an irrational competitor with low pricing, 2) tight industry capacity, 3) continued rail service issues and 4) a conscious decision to reduce its auto exposure. These four factors will likely continue to weigh on volume growth over the near term. That being said, HUBG's stock has generated significant momentum over the last three years despite lackluster volume growth. Firm suspects that this could be true going forward as well.

New 2006--2008 EPS estimates are $1.10, $1.28 and $1.41, up from $1.09, $1.15 and $1.22,
respectively. Firm's new 2006--2008 operating margin forecasts (as a percent of total net revenue) are 34.1%, 35.3% and 35.8%, up from 33.5%, 33.7% and 34.1%, respectively.

Tgt goes to $33 from $30. Maintains Buy.

Notablecalls: Putting on my nostalgic hat again. At my old trading desk, after reading the note I would most certainly go into 'all your HUBG belongs to me' mode. This stock is a mover and you want be in it.

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