From here onwards, figuring out the direction of Sabre stock requires an understanding of the direction of revenue, as well as the direction of FCF. It will require more work on both, but here goes a best effort:
Revenue:
- On TN we see -1% to +2% range for y/y domestic transaction comps in the next several quarters through the end of 2018. As discussed earlier, this is a volume read based on current data, seasonality, and trajectory of comparisons. We got TN pricing wrong into 3Q17, so we will step back from comments on TN pricing until further analysis and data collection. Based on analysis of the historical data plus our read of the existing negotiation landscape, our previous thinking was that pricing was headed gradually lower over a long period of time
- AS - the LATAM cutover sometime in 1H18 is bullish (40m total PB) but the potential loss of AA is bearish
- HS - bullish while the Wyndham conversion continues, but then probably less than d-d% post Wyndham, unless they win another giant name (which we think unlikely while Wyndham is publicly giving the effort a grade of "B")
FCF:
- HP giveback will be down in 4Q17 over 4Q16 but still a potent driver of FCF in 2017, yet expires in 2018.
- Capex has been underspent YTD in 2017, but should pressure 4Q17 and 2018
- Some of the above is offset by the RIF and 11% reduced labor force entering 2018
As you can imagine, I think rushing to a decision here is probably a weak-ish idea. I accept the big short-covering rally today, and while it sucks, my game-plan is unchanged, which is that Sabre remains a Short.
Incremental bull / bear
Bull case:
- Pressure on travel revenue easing thanks to pricing improvement
- Wyndham rollouts will help maintain Hotel Solutions growth rate through middle of 2018
- Worst of Airline Solutions catastrophe behind us with Southwest exit
- On FCF basis, the business seems better than we estimated
Bear case:
- The issues around the NDC are really just getting started and the pressure on the business will only increase
- Sabre saying they will lead the charge or be the voice of reason kind of falls on deaf ears given they are about ~18 months behind the rest of the technology providers in that zone (and have no cash to go make interesting acquisitions among the new tech providers!)
- And, trying to assuage investor concerns by talking about revenue management and dynamic offers is a bit vacuous when that product seems yet to be in the market.
- TN comps are tough on go-forward y/y
- FCF is good right now because they have underspent capex YTD, next year FCF is a bit more murky as the HP giveback goes away, capex pressure remains, and some of that is offset by the impact of the RIF
Lastly – no one asked about AA, but everything we have read highlights a risk that AA may officially leave Sabre next year (another ~$40m hit to revenue).
We started this process because we saw an old creaky tech company basically consistently mis-messaging about growth and FCF expectations to investors. A lot of our thesis has been proven right in the last 18 months. What continues: bad balance sheet has gotten worse, capital continues to be mis-managed, products continue to trail, messaging has gotten a bit better but the hopes and dreams around a dynamic revenue management product should not be modeled into reality.
How does this all shake out? For now we understand that the debate has shifted, we see the temporary FCF yield based risk to the upside, and we continue to think a business facing stiff headwinds on competition, product, technology, and market, with a worsening balance sheet and pre-spent FCF on an annual basis that limits all their optionality around either innovation, M&A, or debt repayment, should probably not trade anywhere near growth comparables. We'll leave it there.
