The data we use to track Sabre’s results for 4Q17 still point to a slight top-line miss. Our 4Q17 revenue estimates are now a bit below Street, GM% well below, OP ~ in-line, and FCF in-line. However, the results for both October + November monthly data were much better than seasonal, better than trendline 2H17 transactions, and keeps the trailing y/y transaction growth in consistent ranges over the last year. It thus looks unlikely for us to expect major topline weakness in 4Q, and maybe less so in 1Q18, which has been a key thesis for us over the last ~18 months of being Short the stock.
Our original bear thesis was that Sabre's underlying growth rate was well below the advertised blended M&A/organic rate, that the company would never become the FCF gusher that had been advertised by management, and that the valuation was completely overstated in light of those factors. Most, if not all, of this bear case is in the stock today.
Our current bear thesis is that Sabre's product and infrastructure are still un-competitive with key peer Amadeus, and that the next several years will see incremental airline solutions revenue opportunities pursued by an increasing hoard of new providers, thanks to the IATA's NDC efforts. To improve and modernize their technology, Sabre has many miles and many investments left to go; primarily around increasing the resiliency of the company's infrastructure (think outages + security breaches in 2017), and re-writing code to make their product tree more flexible so that it can compete head to head and win against Amadeus on more than just price.
But we are aware of the change in thesis, the fact that our first thesis has mostly played out, and the fact that the stock is still heavily shorted likely mostly on the first thesis. There will be a great time to Short SABR again, so we will stay vigilant on this position, and continue our data tracking efforts as well as our analysis.
What is the Bull Case?
- Better data – 2018 #s no longer look as risky
- RIF means they can replace missing FCF from end of HP (TXC) deal
- Heavily shorted laggard
This is how the stock sets up to us entering 2018:
- The stock is heavily shorted (~10-11 days to cover)
- The data shows clear improvement in 4Q trend line, still setting up for 4Q miss but not as widely as previous, and 1Q18 looks achievable, kind of evaporating the short term case for the Short
- The Hotel Solutions segment has tailwinds for 4Q17 - 2Q18 on the last 2-3 quarters of the Wyndham roll-out
- AND, the layoff means OPEX should be pointing 10-11% lower entering 2018, or an $80-90m pre-tax positive to OCF y/y potentially enabling SABR to guide to ~$400m FCF in 2018 (Street ~$370m)
Impact of the new Tax bill
The tax impact to SABR is mixed.
- The company has been recognizing non-GAAP taxes at a ~30% rate, which will drop and help non-GAAP EPS. The rate drop will also likely affect Sabre's liability accrual rate for when Sabre begins paying cash US taxes
- The company has been avoiding US taxes thanks to NOLs and thanks to high interest expense deduction. The latter can now only shield 80% of obligations, and the former can only protect 30% of EBITDA. Net, our guess is that Sabre will have to start paying US cash taxes sooner than their original plan of ~2020.
- Sabre has stranded cash in foreign banks worth $123m. Given's Sabre's very thin balance sheet, weak FCF, and existing shareholder obligations (TRA, tax, and buyback), the company has been re-patriating cash inefficiently. With the reduction in cash repatriation rate from statutory to 15.5%, Sabre will get some extra cash now at a lower rate.
Final 2017 Thoughts on Sabre:
Recently, a senior director at Sabre posted in an online forum where employees were upset about the company's firing policies. The senior director defended Sabre, explaining that management has to run the company for investors – so that investors can eke out a return. In our view, that sounds like a path to failure. The company should be run for the delight of customers. Make your product the best in the world. Make your customers love the product. Some will even evangelize it for free. If customers love your innovation, your product, and your service, the rest of the business model elements will be easy to fix. Those are the best companies. Sabre, running the ship for investors, means they have to manage to a certain fixed % bottom line so that they can pay a dividend? Pay TRA? Pay buyback? Sorry, but that’s not going to lead to victory or success. That’s why Sabre makes big headcount reductions, is ‘fine’ for a while, then hits a wall again.
Where are we in that cycle now? We are in the ‘fine for the moment’ part.
Happy holidays
