Market Overreacts to Sabre's Rattle
We continue to expect earnings to accelerate starting next year.
Sabre (SABR) is executing well on the factors under its control. In the first quarter, its air booking share grew 140 basis points to 38.3%, the fifth straight quarter of share gains, and the company continues to migrate slow and expensive mainframe functionality to a faster, cheaper, and more reliable open-source platform. However, Sabre is facing new headwinds out of its control as its customers are affected by financial hardship (Jet Airways) and 737 MAX crashes (Lion Air and Ethiopian Airlines). These external events reduce our 2019 sales, EBITDA, and free cash flow projections, but our estimates for the underlying business are unchanged. We view the share price decline after the earnings announcement as an overreaction and continue to expect an earnings acceleration for Sabre starting in 2020 as platform investments and current customer headwinds wane.
In late April, reservation customer Jet Airways announced it was suspending flights due to financial hardship caused by the competitive landscape. We estimate that Jet Airways accounted for about 3% of Sabre’s total 2018 passenger boardings in its airline IT segment, which was 28% of its total sales last year. We are removing this customer from our 10-year forecast. This segment is also seeing a modest headwind from reservation customers Lion Air and Ethiopian Airlines after their 737 MAX crashes. As result, we expect 2019 air solutions revenue to move to a 4% decline from 2% growth prior.
Dan Wasiolek does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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