Shareholders of Sabre would probably like to forget the past six months even happened. The stock dropped 60.9% and now trades at $1.22. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Sabre, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Sabre Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Sabre. Here are three reasons why SABR doesn't excite us and a stock we'd rather own.
1. Weak Growth in Total Bookings Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Sabre, our preferred volume metric is total bookings). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Sabre’s total bookings came in at 95.14 million in the latest quarter, and over the last two years, averaged 1.5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While Sabre posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Sabre’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.7%, meaning it lit $4.72 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Sabre’s $4.22 billion of debt exceeds the $682.7 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $502.2 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Sabre could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Sabre can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Sabre, we’re out. Following the recent decline, the stock trades at 11× forward P/E (or $1.22 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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