TRAVEL STOCKS: EXPEDIA vs SABRE CORP HOTELS vs AIR TRAVEL

Travel was supposed to be the recovery play in 2022…then 2023.

But you wouldn’t know it by looking at the travel stocks. There’s a few ETFs out there, and PEJ-NYSE is just the largest market cap—and it went nowhere in post-pandemic times:

Two other ETFs, AWAY-NYSE (hospitality) and JETS-NYSE (airlines) show similar charts.

Two global stocks–Sabre Corp (SABR – NASDAQ) and Expedia (EXPE-NASD) are arguably cheap—Expedia is for sure at 9x leading (2023) Free Cash Flow (FCF). Even at 16x leading cash flow, Sabre COULD BE—if you believe their 2025 estimates of adding $900 million(!!!) in EBITDA by year end then.

Sabre operates at the backend – connecting travel suppliers like airlines and hotels with online travel agencies, travel management companies and corporate travel departments.

Sabre isn’t a front-end operator ala Expedia (EXPE – NASDAQ) orBookings.com (BKNG – NASDAQ).   Those companies are the aggregators – they source the data that these platforms tap into to generate results.

Expedia is the much safer bet, and Sabre is (by far) the leveraged trade, and that can be summed up in this one chart from Sabre’s powerpoint:

The recovery in gross air bookings has not enjoyed near the same post-pandemic rebound as hospitality—and as I’ll show you in a chart below, Sabre is MUCH more leveraged to air travel than Expedia. 

If travel picks up to get close again to 2019 levels, Sabre says their incremental EBITDA is huge—up to $900 million.

But the stock chart says either the Street doesn’t believe them, or they’re willing to wait.

IS SABRE WORTH BUYING YET?

Here’s a tip. When a company puts out results and the first 3 bullet points have nothing to do with the numbers—like they did below for Q4—it means it wasn’t a good quarter.

The results were… not great. Sabre missed full year guidance.  The market punished them.

Sabre did $65 million of EBITDA in 2022. The problem was that they had guided to $90 million as recently as November.

Those numbers look even worse when compared to some of the “possible scenarios” that Sabre put out at the beginning of 2022.

Of course, year-over-year the quarter didn’t look that bad.  Revenue was up 26% over 2021.

But deciphering 2022 travel comps is a tricky business. Sabre delivered their best Q4 since 2019. But in 2019 (ie. the last time things were normal) the results were a lot better.

In Q4 2019 Sabre generated $157 million of cash flow and $133 million of FCF. In Q4 2022, those numbers were only $38 million cash flow and $22 million of FCF—both down about 75%.

Revenue was way down as well: Q4 2022 revenue was $631 million, down from $941 million in Q4 2019.

While business is getting better at Sabre, the speed of the recovery is disappointing.

CAN THIS TEAM DELIVER ON GUIDANCE?

Investors knew it would take time. Since COVID, Sabre has been a turnaround story. Travel would recover, but it would not happen overnight.

Management at Sabre has been targeting 2025 as the big year. That is the year when the recovery in revenue is supposed to tip EBITDA (and FCF) to levels that will far exceed 2019.

Sabre came up with their 2025 target at the end of 2021.

As the 2022 results ticked in below expectations, Sabre has been questioned on those numbers, most recently on their Q3 call:

But Sabre is sticking by their recovery story, even with the slow start.

Quite honestly, if they can even hit the bottom end of that 2025 range, the stock would be pretty darn cheap right now.

What has to change for that to happen?

SABRE DEPENDS ON AIR TRAVEL

You can get insight into Sabre by comparing their recovery to Expedia (EXPE – NASDAQ).

While Expedia’s stock has been a long way from being an outperformer, it has done better of late than Sabre’s has.

Expedia’s better stock performance comes from a better performing business. By Q4 2022 Expedia was almost all the way back to 2019 revenue levels. Q4 Revenue came in $2.62 billion versus $2.75 billion in 2019.

That is A LOT better than the 30% lower number that Sabre posted.

The difference? Well, I don’t want to simplify things too much. These are clearly different businesses. Expedia has brand power; they are customer facing and they have a leading position in the online travel market.

But one BIG difference between the two businesses is their focus. Expedia is far more dependent on hotel traffic. Sabre is geared to air travel.

Sabre’s air bookings generate much more revenue than their lodging, ground and sea bookings:

In their 10-K Sabre describes how “all of our businesses are highly dependent on airline ticket volumes”.

Yet while hotel transactions are above 2019 levels, air bookings are still well below that level.

It isn’t a big surprise that air travel has lagged hotels. Between country specific COVID rules, slow to recover business travel, and all the bungling by airports and airlines, the incremental passenger is choosing to stay closer to home.

CAN EARNINGS LEVERAGE HAPPEN IN 2023?

Sabre’s recovery has been held back by air travel so far. How about going forward?

Sabre’s 2023 guidance was actually not bad, especially after considering how weak 2022 was.

Revenue at the mid-point would be up $400 million or 16%.  Maybe most important: that extra $400 million of revenue would drive $250 million of extra EBITDA.

If Sabre could pull this off it would suggest HUGE leverage in the business. 

This is what Sabre has been telling us for the last 3 years.  They have been overhauling their infrastructure. Streamlining it. Moving to the cloud.  They have said again and again that this transformation is going to reduce costs and drive incremental revenue to the bottom line.

The cost reductions are tied to moving volume to the Google Cloud, a transition that is largely complete.

The transition is supposed to drive efficiency and lead to large reductions in infrastructure costs.

Based on their estimates, Sabre believes that the tech transition will save ~$40 million in 2023 versus 2022. With more savings to come in 2024 and 2025.

Investors have been skeptical. Or at least they want to see the proof.

On the third quarter call Morgan Stanley analyst Joe Baer appeared a bit incredulous that Sabre could really drive that much incremental margin:

To Sabre’s credit, they are sticking by their guns.

Their 2023 guidance is calling for $250 million of incremental EBITDA. If you subtract $40 million of expected cost savings you get pretty close to the 50% incremental EBITDA margin ($210 million of EBITDA on $400 million revenue) that Baer is calling out.

Maybe they can pull it off?

IS THE UPSIDE IN SABRE STILL THERE WITH A RECESSION COMING?

I wrote about the airline industry a few months ago. One of the key takeaways was that demand was coming back—but that the industry had cut back so much over the pandemic that it was having difficulty handling the growth.

But they will figure it out. When they do, the knock-on effects should work their way into Sabre’s bottom line.

If, IF, that happens, Sabre’s stock may actually be quite cheap—even if it doesn’t appear to be right now.

Sabre has a market cap of $1.15 billion. Their net debt is much more – about $4.75 billion.  Debt, especially debt right now in this high interest rate environment, is the big risk here.

Based on their 2023 guidance – $310 million of EBITDA at the midpoint – Sabre trades at 16x EV/EBITDA.

That hardly seems like a bargain.

So why do I say this could be a cheap stock?

Well, it all comes back to the 2025 story.  It is not about what Sabre earns this year. It is about being on track to meet those 2025 targets.

Sabre says they can do at least $900 million EBITDA, $500 million free cash flow at the low-end.

At today’s stock price, that is a little over 6.5x EV/EBITDA and only 2.3x Price/FCF.

Clearly the stock is not pricing in a big chance of success.

Of course, it is not without good reason. They missed their 2022 numbers. The economy is slowing.  Now we have a banking crisis.

There are plenty of reasons to be skeptical. The question is – is all that skepticism already in the stock?

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