EUR 850.00 For Business Accounts Only

Morningstar | Amadeus Seeing a Macro Slowdown in Its Core European Market; Shares Overvalued

Narrow-moat Amadeus joined the chorus heard from other travel companies in saying it is seeing signs of macro-related slowing in its core European market (33% of total air bookings and passengers boarded). On the increasing signs of slowdown in overseas markets, we plan to shift our modeled 2020 cyclical downturn into 2019, which will be mitigated by the time value of money. As a result, we don't expect a material change to our EUR 55 valuation, leaving shares overvalued. For those seeking travel-related exposure we see peer Sabre trading at a more attractive margin of safety.

Although 2018 sales and EBITDA (excluding acquisitions) of EUR 4.9 billion and EUR 2 billion matched our forecast, it is clear that Western Europe and the Global Distribution System, or GDS (61% of total revenue), industry as a whole is decelerating, as geopolitical concerns begin to weigh on travel budgets. In 2018, the GDS industry saw 2.9% air bookings growth, but in the fourth quarter the lift was only 1.1% versus a 3.5% increase averaged for the first nine months of 2018). Amadeus' air booking business in Europe declined 7% and fell 8% in 2018 and the fourth quarter, respectively. Although we believe most of the weakness is macro-related, we maintain our view that Sabre is becoming more competitive in Europe. Meanwhile, APAC (21%) fourth-quarter air bookings were up only 3.2%, a deceleration from the 11.7% growth reported for all of 2018, as we believe cyclical pressures exist here, too. North America (19% of total air bookings) fourth-quarter air bookings were solid, up 12.6%, as we believe Amadeus is becoming increasingly more competitive with Sabre in this region. In total, Amadeus' GDS booking share dropped to 43.7% in 2018 from 43.9% in 2017, as Sabre gained share overall.

Amadeus guided for low- to mid-single-digit GDS sales growth in 2019 versus our existing 5% estimate, which we plan to lower toward our 2020 2% GDS growth estimate as we push our cyclical downturn forward.

Amadeus' IT Solutions business (39% of total sales) is holding up better. In 2018, revenue grew 13% to EUR 1.9 billion, slightly ahead of our $1.8 billion estimate, as the company continued to experience solid organic passenger boarding growth of 7.6% versus our 7.3% estimate. As a result, management guided to double-digit sales growth for the division in 2019 versus our 17% estimate, which we might only revise down slightly to account for some heightened cyclical pressure.