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Morningstar | We Believe Travelport's Weaker 3Q Mostly due to Transitory Headwinds; Shares Undervalued

Although narrow-moat Travelport reported Travel Platform sales growth of 2% versus our 4.5% forecast, we believe it was mostly due to temporary headwinds (weather disruption and customer transition), implying an unwarranted 8% drop shares today. Still, we expect to lower our $18 fair value estimate by around $0.50 to account for these near-term headwinds and increased cyclical risk.

Trading at 10 times our 2019 EPS estimate, 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), generating an estimated 10% earnings per share CAGR over the next five years.

Although International (60% and 75% of bookings and sales, respectively) reported a 5% decline in transactions (a 1% drop on a two-year stacked basis versus 4% in 2017), it is important to consider that Travelport faced a 7-percentage-point headwind from customer transitions in the Pacific and European regions. Excluding these headwinds (that alleviate as we enter 2019) we see oversea underlying 2% growth as stable and healthy. Specifically, Travelport increased Asian bookings (around 30% of oversea bookings) 24%, outpacing market growth of 13%. This strength in Asia was driven by the company’s leading position in India, which is the second-largest GDS market in the world. Meanwhile, Travelport's other large international region, Europe (nearly 40% of Travelport's international bookings), dropped 4% (excluding the terminated OTA customer) in line with the market, as weather and World Cup disruption temporarily slowed travel in the region.

While Travelport's booking trends in the U.S. (40% and 25% of bookings and sales, respectively), are not weakening they do leave some room for improvement we believe, as transactions declined 4% in the quarter, well below the 6.7% growth seen in the market (Sabre reported an 8% lift in North America) because of limited exposure to the region's leading OTA.

Travel management company CWT will be rolling off Travelport by 2020 as it decides to simplify its infrastructure that is currently more complex than others. At this point, we don't view this transition as material to our fair value estimate, as Travelport mentions some corporations are moving away from CWT because they don't want to deal with the disruption that a distribution system change can create, and also as new corporate business is being won for the company.

Still, revenue per booking remains very solid, up 7% in the quarter. Here the main driver is the company's leading payment solution, eNett (14% of total revenue) that increased revenue 58%, above our 40% forecast.

Travelport now expects 2018 revenue, EBITDA, and free cash flow to come in at the lower end of prior guidance of 4%-6%, 1%-3%, and 5%-15%, respectively. As a result, we plan to slightly reduce our sales, EBITDA, and free cash flow 2018 forecast of 6%, 1.5%, and 8.5%, respectively.