Morningstar | Sabre's Narrow-Moat Intact as It Reports Healthy 2018 Results; Shares Undervalued
We don't see any reason to materially alter our $29 Sabre valuation, with its reported 2018 results and outlook harmonizing with our model for mid-single-digit average annual sales growth over the next five years and 2023 operating margins around 18% versus 14.5% in 2018. We remain encouraged by Sabre's execution of revitalizing its platform through cloud investments, which we believe supports its network, switching cost, and efficient scale advantages (sources of its narrow moat). Trading at just 14 times 2019 EPS (below 18 times on average the previous five years), we see opportunity for investors to own an attractive business model tied to volume and not price (in 2009 global passenger growth was flat) with improving technology positioning.2018 revenue and EBITDA were up 7.5% and 4.2%, respectively, versus our 7.7% and 4.1% estimates, with free cash flow growth of 22%, well ahead of the initial 8% guidance given a year ago. Travel Network (73% of sales) revenue grew 10%, versus our 10% estimate, as the company's booking share rose to 37.5% from 36.3%, driven by its Flight Centre win from Travelport. Further, division revenue per booking increased to $5.03 from $4.86, as investments into improving security, reliability, and innovation drove add-on business. Meanwhile, Airline Solutions (21% of sales) revenue was up 1% versus our 0% estimate, as lost Southwest business weighed on results (organic growth was 5.2% versus our 5% estimate). Hospitality (6% of sales) revenue lifted 6% versus our 8% estimate, as industry consolidation weighed slightly on results.
Sabre guided 2019 sales, EBITDA, and free cash flow growth of 4%-6%, 2%-6%, and 10%, respectively, versus our estimates of 5.5%, 6%, and 13%. We may slightly reduce our Hospitality and Airline Solutions forecasts to account for near-term consolidation and migration headwinds but still see these businesses growing sales a low-double-digit and high-single-digit percentage on average annually, respectively.
Cloud investments continue to pay off, as evidenced by a 30% reduction in stability incidents and a significantly reduced average time to recovery.
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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