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Morningstar | Narrow-Moat Sabre’s Transitory Headwinds Once Again Present an Attractive Investment Opportunity

Like 2017-18, we believe investors’ current focus on Sabre’s near-term investment and issues outside its control have greatly discounted the company’s intact network, efficient scale, and switching cost advantages, the sources of its narrow moat, allowing an attractive margin of safety.

About two years ago, Sabre shares underperformed because of misguided concern over cloud investment, which dampens near-term profitability but supports long-term innovation, latency, and network reliability at lower costs, and issues outside the company’s control, such as customer Air Berlin’s financial distress. But we thought Sabre’s competitive position was intact and that a newly hired C-suite would be able to revitalize the company’s platform. As evidence, free cash flow accelerated to 22% growth in 2018, ahead of 8% initial guidance, from a 2% drop in 2017, as cloud investment began to reduce capital expenditure and support its booking share in the global distribution system industry. As a result, Sabre shares outperformed during 2018.

In 2019, Sabre shares have underperformed, falling around 6% versus the S&P’s 9% increase, as investors again focus on the company’s discussion to accelerate platform investment into 2019, while IT customers Jet Airways, Ethiopian Airlines, and Lion Air face their own specific issues, which are out of Sabre’s control. While this is a headwind to earnings profitability this year, Sabre’s competitive position is fully intact, buoyed by its air booking share growing 140 basis points to 38.3% during the first quarter. In fact, we believe Sabre’s decision to accelerate cloud investment in 2019 is a direct result of the strong results seen from its 2017-18 platform expenses. As a result, we expect earnings to reaccelerate from a 37% drop in 2019 to 19% growth and 49% growth in 2020 and 2021, respectively, as investment spending and client issues wane.

Sabre continues to migrate to an updated cloud platform, which will improve reliability and speed of service, supporting its intact network, switching costs, and efficient scale advantages. We are encouraged that over 90% of Sabre's processing power is now on open systems (less than 10% on outdated mainframe) and that over 50% of its computing footprint is in the cloud (up 14 percentage points from the end of 2018). While the transition remains a multiyear event, 2019 represents the heavy-lifting year, and earnings growth of 19% should resume in 2020.