Morningstar | Sabre Posts Another Solid Quarter; Resilient Model and Competitive Advantages at a Discount
Our long-held thesis that Sabre's investments the past 18 months would successfully revitalize its technology offering gained further support with air booking share up 2.1 percentage points to 38.6% in the third quarter. As a result, Sabre raised its 2018 sales and EBITDA guidance to 7%-8% (compared with our 6% estimate) and 3%-5% (our 3% forecast), respectively, from 4%-7% and 0%-3%. We don't expect a material change to our $28.50 valuation, as we plan to slightly lift our 2018 estimates, mitigated by us pushing forward our existing 2020 cyclical slowdown forecast into 2019.Trading at just 14 times 2019 EPS (below the 18.5 times average the previous four years), we see opportunity for investors to own an attractive business model that is tied to volume and not price (in 2009 global passenger growth was flat) with improving technology positioning that is leading to positive free cash flow inflection (free cash free estimate to be up 18% in 2018 from a 2% drop in 2017) and an intact network effect, switching cost, and efficient scale advantages (sources of its narrow moat).
Travel Network (72% of total sales) grew a robust 11% ahead of our 6.5% estimate, driven by broad-based air share gains across the APAC (bookings up 18%), NAM (up 8%), and EMEA (up 4%) regions. As a result, Sabre raised its 2018 sales guidance for the segment to 9.5%-10.5% growth from 6%-8% prior, and we plan to lift our 8% forecast accordingly, mitigated by slight industry passenger growth deceleration in 2019 versus 2020 prior, to account for economic pressures potentially occurring earlier.
Airline and hospitality (28% of total sales) revenue grew 1.6%, near our 1.2% forecast. Encouragingly, Sabre is seeing a higher rate of renewals, leading to an expectation of flat growth for the segment in 2018 versus a low-single-digit decline prior (our 3% drop), despite having lost Southwest earlier in the year. We see this as further indication that past platform investments are paying off.
Sabre is a technology solutions provider to the travel and tourism industry. The company operates through three business segments: Travel Network, which consists primarily of its global distribution system (GDS) and a range of solutions that integrate with its GDS; Airline Solutions, which provides a portfolio of software technology products and solutions, through software-as-a-service (SaaS) and hosted delivery model, to airlines and other travel suppliers and provides software solutions; and Hospitality Solutions, which provides software and solutions, through SaaS and hosted delivery model, to hoteliers around the world.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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