Seeking Alpha published a new Top Idea on August 20, 2020 – a thesis on Sabre Corp. PRO Subscribers have 7 days of exclusive access to Top Idea articles. Find out more about Seeking Alpha PRO here.
Seeking Alpha: For investors who may not have seen your Top Idea article on Sabre Corp, can you briefly summarize the thesis?
Michele Manganelli: Sabre (NASDAQ:SABR) offers a Global Distribution System (GDS) platform to the travel industry. The platform brings together content such as inventory, prices and availability from a wide range of travel suppliers (airlines, hotels, car rentals) and this content is made available to travel buyers, mainly travel agencies and travel management companies (TMC). It’s business model is particularly successful due to two main factors:
- High barriers to entry coming from the resources necessary to aggregate the same amount of travel information.
- High switching costs coming from its strong network effects. Travel suppliers have tried to bypass GDS systems in the past with not much success; moreover, the conversion from indirect to direct offerings have been much slower in North America, thus further consolidating Sabre’s competitive position in the US
The company operates in an oligopoly, with the top 3 companies in the industry controlling 95% of market share. The recent drop following the COVID-19 outbreak could represent an opportunity to buy a company with a strong business model and a solid customer base at a significant discount.
Seeking Alpha: Sabre is a relatively undercovered company. What inspired you to research this industry, and ultimately Sabre?
Michele Manganelli: Fun fact, my younger brother is studying to become a pilot, so aviation has always been a recurring topic at home. Seeing the big drops in airlines’ shares following the COVID-19 pandemic, I do think there is some value to be found here. If you want to play the airline rebound (and that is a big if) I believe Sabre offers a compelling story and a good way of protecting your portfolio from company-specific risks as it acts like an aggregator amongst airlines and travel agencies (it’s the same idea behind playing Roku instead of Netflix, or Synopsys instead of Intel).
Airlines will continue to use GDS platforms, as demonstrated by lots of failed attempts to bypass these platforms and exclusively go for direct channels. There is a possibility that the current pandemic will actually increase demand for GDS adoption as airlines try to refill seats after the demand-shock (look at Booking.com after the Great Financial Crisis).
Seeking Alpha: What element of your bullish thesis do you believe investors are most overlooking, and why?
Michele Manganelli: I do believe a future expansion into the European region is not fully priced in. Sabre has a key advantage over its direct competitor Amadeus: since Sabre almost exclusively operates in the North America region, it has the opportunity to expand in a much more fragmented European market. On the other hand, it will be far more difficult for Amadeus to expand in the North American market, especially after the significant consolidation following the Great Financial Crisis.
In this sense, COVID-19 could represent an opportunity for Sabre as it may slow down industry consolidation in Europe. When the pandemic hit, many European airlines had to face a harsh reality: barriers to exit. Operators prefer to run flights even if they are loss marking in order to keep cash flows coming into the business in the short-term. This, coupled with governments who are unwilling to make national carriers disappear, will likely make mergers more complicated and thus delay industry consolidation. As a result, Sabre could have the opportunity to tap in the European market by gradually winning small customers.
Seeking Alpha: Aside from the volume of transactions, how might usage of travel solutions services change in a post-COVID world? Will changes in travel behaviours drive a lot of change in how travel solution services are consumed? And how will Sabre be able to adapt to these changes?
Michele Manganelli: Until we have an effective and widely distributed vaccine, travel volumes and habits will be heavily impacted. I see three main consequences:
- People might be willing to drive (and not fly) to closer destinations and domestic travel will recover first. If this could negatively impact Sabre’s airline segment, it could have positive consequences for the hospitality (Sabre’s fastest growing segment) and car rental services. Given its strong presence in hospitality, with more than 1,000,000 properties in 174 countries, the company could successfully mitigate the negative impact on the airline segment
- Airlines will try to cut costs where possible and the cost cutting could benefit Sabre’s Airline Solutions business and many operators have turned to third-party systems to better manage operations
- Business travel will likely recover faster. Business clients, who usually book flights through TMC platforms and represent around 80% of an average airline’s ticket revenue, are much stickier than retail clients. Even though price might be a criteria, time and convenience are of greater priority for business customers and once business travelers start using a TMC (like American Express Travel), they have no incentive to ditch that TMC to buy tickets through direct channels.
Sabre’s solid business model should help the company to navigate short-term demand shocks, even though it remains exposed to the risk of a second wave and of an elongated time until an effective vaccine is widely available. These factors could become problematic as: (1) they could have another impact on short-term demand (2) could lead to potential need for additional liquidity, even though Sabre’s competitive position and cash-generating ability in normal times could give the company some flexibility when negotiating with banking partners.
Seeking Alpha: For readers who are less familiar with your work, can you describe the types of opportunities that you generally look for?
Michele Manganelli: Sabre is a bit of an unusual pick for me. I tend to focus on innovative and fast growing companies in two main industries: Technology and Communication Services. I consider myself more of a “growth” investor than a “value” investor and I have been focusing on key trends including streaming (long ROKU), electronic payments (long SQ) online business solutions for small/medium enterprises (long WIX, HUBS), online advertising (long GOOGL, FB, TTD) and new communication services (long TWLO).
Sabre might look like a good way of diversifying my fairly concentrated portfolio, both in terms of investment strategy (value vs growth) and industry (even though Sabre is technically a tech company).