2023-09-25 10:00:00 ET
Summary
- Sabre Corporation, a leading software and technology company in the travel industry, has struggled since its IPO and has seen a decline in stock value.
- The company has a history of negative free cash flow and a significant amount of debt, raising concerns about its ability to survive.
- However, there are signs of improvement, including market share gains, cost reductions through a partnership with Google Cloud, and positive guidance for future earnings and free cash flow. Investors should monitor the debt level and FCF trends before considering buying the stock.
I don't know how much this matters at this point but in interest of full disclosure, about 15 years ago, I interned for nearly a year at Sabre Corporation ( SABR ), the subject of this article. I enjoyed my time at the company, especially the brand recognition it gave to my resume and of course, the pay. Sabre was among the highest paying companies that frequented our campus back then. I ended up getting a full-time offer in their Datawarehouse team but before things could materialize, the financial crisis of 2008 took over and I parted ways with Sabre. I did keep up with the company and some friends over there but was largely disconnected until the company's surprise IPO in 2014.
Company History
In its own words , Sabre Corporation is a leading software and technology company that powers the global travel industry. Sabre Corporation provides the leading global distribution system for air bookings in North America. The company was founded in 1960 in a collaboration between American Airlines Group Inc. (AAL) and International Business Machines Corporation ( IBM ) to create the world's first computerized airline reservation system. One of Sabre's most popular brands, Travelocity.com was sold to Expedia Group, Inc. ( EXPE ) in 2015. To see a full list of Sabre's current products, please visit this page.
Stock History
Sabre priced its IPO at $16 and to say the stock has generally struggled since then would be an understatement. A few examples below. The stock
- has not crossed $30 ever, topping in the $29 range as shown below
- is down almost 75% from its initial offering price
- is down 83% in the last 5 years
- is down 25% in the last year
- is down 13% in the last month
The only meaningful timeframe in which the stock has traded up is in the last 6 months where it is up about 12%, driven by the company's Q2 earnings beat . Overall, it is pretty evident that Mr. Market has not been satisfied with the company's performance for any meaningful timeframe. Let us see if that is justified and if there is an opportunity for investors here.
Free Cash Flow Disaster
I tend to start my analysis of most small caps with Free Cash Flow [FCF] for two reasons:
1. Earnings can be skewed upwards or downwards by one-offs.
2. FCF is one of the simplest and powerful metrics to estimate a company's core operating strength. It is basically the cash a company has left from its regular business operations after deducting expenses that support its operations.
Looking at Sabre's Free Cash Flow (or lack of it), I am almost lost on where to being with the bad news as they are aplenty.
- In the last 12 quarters, which is three full years, Sabre has had just one quarter with positive FCF. Even that quarter was barely positive at $22 million.
- In the last 5 years, Sabre has averaged -$55.59 million in quarterly FCF with the highest being $140.73 million. The $140.73 million does not look all that bad until you consider the details in the section below.
To summarize this section, it is not an overstatement to say Sabre is bleeding money. But let's be clear that FCF is not foolproof. It does exclude depreciation expense and interest expense. Depreciation expense affects different companies differently. For example, capital intensive industries like airlines and manufacturing have high CapEx and they offset that by depreciating their assets over time. However, interest expense is without any variance. It is what you pay your lenders. Plain and simple. Hence, for small caps, the 2nd most important metric I look at after FCF is usually debt and interest expense.
Debt Mountain
Sabre's debt of $4.79 billion is more than three times its market capitalization of $1.47 billion. Since shortly after going public, Sabre's long-term debt has almost doubled from $2.6 billion in 2015 to the current level. This debt to market capitalization ratio of 3:1 is one of the highest I've seen since I started analyzing small caps on Seeking Alpha.
Hence, it is not a surprise that Sabre's interest expense on debt has gone up 60% on a YoY basis as shown below. With interest expense going up for 5 consecutive quarters in a rising rate environment, it is safe to say Sabre is likely to pay at least an average of $100 million/quarter in this category for the next few quarters. And as hinted in the FCF section above, the interest expense section puts the company's FCF woes in much worse light. If that does not sound concerning yet, I will close this section with one more number. Annualizing the most recent quarter's interest expense, Sabre is set to pay its lenders ($420 million) a little more than 1/4th of its total worth (market capitalization of $1.47 billion) every single year. Of course, the company can and has been refinancing but the flip side applies too where the company may need to borrow more. Overall, negative FCF, increasing debt, and increasing interest expense on debt are powerful, triple whammies for Sabre corporation at this point. They are big enough to make me worry about the company's ability to survive for long, should this trend continue.
But Wait, There Are Signs Of Life
While I am extremely concerned with Sabre's business and debt woes, there are a few recent positives. There is a reason the stock went up after its Q2 report as Sabre has been executing on its strategic priorities as highlighted below:
- As part of its sustainable growth initiative, Sabre gained market share in industry bookings with 1.4 pts gain YoY.
- Sabre is also leveraging its partnership with Google Cloud ( GOOG ) to good effect as the company retired 15 of its data centers. Almost 75% of its computing now takes place on Google's cloud, leading to a 50% cost reduction since 2019 in this category. Overall, Sabre is on track to save $150 million in technology cost in 2023 compared to 2019.
SABR Q2 Tech Expenses (Investors.sabre.com)
- Sabre also guided up its FY 2023 EBITDA expectations to $340 million, up from the previous range of $300 million to $320 million. The company also guided for FY 2023's FCF to be positive, excluding restructuring. But, restructuring is the company's headache and I don't feel the need to give them the benefit of excluding that. That said, the FY 2025 FCF guidance of >$500 million is encouraging and if that holds true, the stock is currently trading at less than 3 times its FY 2025's FCF.
- Lastly, from a technical perspective as well, the stock is showing signs of life as it is trading above its 100-Day moving average while the 200-Day moving average is only about 7% away. The table below suggests that the stock has strong support in the $4 range and buying here may not be a bad idea.
SABR Moving Avg (barchart.com)
Conclusion
I admit it, I want to see my former employer do well. I loved what the company stood for back in the days, being a strong private player (with travelocity.com) in a market dominated by large, public entities like Expedia and the then-Priceline.com. And if the recent Q2 is any indication, there are enough signs that a comeback cannot be ruled out, especially as the company leverages the cloud and cuts down on its Datawarehouse expense (Yea, I know I worked there) while leveraging the scalability GCP provides.
In particular, I like the $500 million FCF target in 2025 and should that materialize, the stock is right now trading at less than 3 times 2025's FCF. While that screams undervaluation, the company's debt situation more than balances that out. I'd recommend the following to investors:
- watch the debt level and ideally for it to come down to at least $3.5 billion by FY 2024. With such high interest expense, even if the company meets its 2025 FCF goals, it may not mean much to the overall picture unless the debt level comes down meaningfully. Other things being equal (like interest rates), getting the debt load down to $3.5 billion would mean an annual interest expense of about $300 million, which gives the company some breathing room should it meet 2025's FCF target.
- watch the FCF levels to see if shows an uptrend from here. The company is just not going to go from -$55 million average/quarter to $500 million a year with no stops in between.
- buy if the stock goes below $3.50, which would represent a 20% pullback from here and place the stock at two times 2025's targeted FCF.
For further details see:
Sabre Corporation: Struggling But Signs Of Life