Why sidelines? 2 thoughts:
- We love the changes being made by management and fully applaud the long-term direction and improvement of the company. L-T shareholders should be Long.
- Looking beyond 3Q18, the short-term fireworks of positive estimate revisions will take a pause. We are in-line on 4Q18 and just a smidge below for 1Q19, despite the many positive changes underway for the company. If our view on estimates is more or less similar to the Street we would have to make a re-rating case to stay Long Sabre, which is not perfectly easy at 17x unlevered FCF - arguably a ‘fine’ valuation for an aging company turning itself around amid a lot of industry change, not all of which is positive for Sabre. What could help investors trigger a re-rating for Sabre? A) much less net debt; B) the type of acquisition puzzle piece that galvanizes one of the 2 main growth divisions (airlines, hotels) with new capabilities and a growth revenue line item, something where 1+1 = 3 or 4 that would already be noticeable over a 24-month period. We actively leave out buyback which just wastes capital on people who don’t need it. Sabre needs to spend every dollar of cash extremely carefully.
What happens in 4Q18?
- Sabre has a chance to show share gains in core TN and additional cost structure improvements thanks to the new data center architecture.
- Sabre launches a new architecture for Airline Solutions, putting the challenge back in the market against peers as Sabre goes on offense. Will customers adopt the new architecture? Yes, because at first glance it appears to contain real innovation, faster time to market for new features/functions, and cost efficiency.
Data Puts Us Ahead on 3Q18:
- Data was strong through most of 3Q18, putting us ~4-7% ahead for revenue.
- Unfortunately, we are just in-line on 4Q18 and below on 1Q19. It is too early to pull hair out on these items as we are modeling trend line averages for those quarters rather than real data, but the direction seems kinda clear, which goes back to the reason we stepped aside on Sabre back in August (note HERE).
Conclusion:
We love the direction, we love the improvement, we’d like to argue for higher valuation but…maybe that’s aggressive right now and needs a catalyst. L-T buyers should be thinking $35-45 on a 24-36 month timeframe as net debt falls and FCF reaches ~$750MM by 2023.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
