Today eight securities firms initiated analyst coverage of Sabre Holdings, the travel technology firm, which had its initial public offering last month.
Four of the company’s underwriters, which had to wait until a few weeks passed to initiate coverage, trumpeted Sabre's stock with buy or overweight calls. Their price targets for one year from now ranged from $17 to $22.
While a so-called Chinese Wall divides the banks’ underwriting arms from their equity research sides, investors generally anticipate positive analyst reports from a firm's underwriters — at first, anyway.
Still, the positive reception may anticipate an overall upward narrative. Sabre's stock (SABR) rose about 3% this morning above its listing price of $16 on April 16 and its opening at $16.80.
Buy calls
Deutsche Bank, one of the most optimistic, initiated coverage at $22. Analyst Bryan Keane praised the company:
"Its Airline and Hospitality solutions business delivered a 14.5% revenue CAGR from 2010 to 2013 and SABR has guided for 12-14% revenue growth in the in mid-term driven by new wins (notably American Airlines and AirBerlin, which will add 220m passengers boarded) and cross-sell opportunities."
Analysts were not put off by Sabre's loss of its longstanding customer Southwest Airlines, who opted to have its domestic reservation system reservations systems replaced by rival tech company Amadeus IT Group. Said Goldman Sachs:
"While we are disappointed by Sabre’s loss of the Southwest contract, we believe the market is overly focused on this event and see the ~30% valuation discount to both its main competitor Amadeus and the transaction processing peer group) as unwarranted....
"For calendar year 2013, Southwest represented for just 1% of total revenues and 3% of EBITDA, and we estimate the contract loss impacts the 2017 growth rate (when the contract ceases) by 350 basis points."
Travelocity: Could rebound in profitability
Prior to the IPO, Sabre effectively handed off the job of powering Travelocity, its online travel agency (OTA), to rival Expedia, and sold its Travelocity Partner Network to Orbitz and the corporate travel agency business (known as Tbiz) to BCD Travel.
Goldman estimates Travelocity has less than 5% of the market.
In 2013, Travelocity generated $586 million in revenue. Goldman forecasts that to plummet this year to $396 million (a 32% drop, year over year).
This year, it expects Travelocity's EBITA margin -- a measure of profitability (earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue) -- to decline to 3%. (Morgan Stanley estimates a drop to 4%.)
But interestingly Goldman and other banks predict that Travelocity's profitability as a business unit will rebound.
Goldman predicts that, by 2015, Travelocity's EBITA margin will rebound to 13%, or $49 million -- which would be the OTA arm's greatest positive contribution to Sabre since 2010. (Slightly more optimistically, Morgan Stanley predicts EBITDA margins rising to 14.5%.)
Jeffries also thinks Travelocity will turn around and will be producing about 13% of Sabre's total revenue in 2015 and 2016 -- down from a 19% contribution to Sabre's revenue in 2013.
Few doubts expressed
In a mid-May, Sabre had its first quarterly conference call as a public company (since being taken private in 2006). It reported that its debt, revenue and passengers boarded all increased in the first quarter.
The company suggests that Sabre Airline Solutions could dramatically increase its revenue as customers with 1-2 products (35% of the base) are upsold to 3-5 solutions each.
Jeffries believes that boost could contribute to a forecasted expansion in Sabre's overall adjusted EBITDA margins, from 25.9% in 2013 to 29.7% in 2015.
One red flag from Goldman:
We estimate 66% of Sabre’s fully diluted share count pro forma for the IPO is held by the private equity consortium that IPO’d Sabre. Investor expectations of a sell down by these shareholders could create an overhang.