Sabre's Prospects Clouded by Macro Headwinds and High Leverage, Analyst Downgrades Stock

  • B of A Securities analyst Victor Cheng downgraded Sabre Corp SABR from Buy to Underperform and lowered the price target from $11 to $7.
  • The analyst became less bullish on the 2023 recovery, leading to more downside potential on the stock, given its high leverage and rising interest rates. 
  • While Cheng expects the wider airline IT market to grow double digits in FY23 as volumes continue to recover, he estimates SABR’s airline IT solutions to increase by 3% in FY23 amid multiple headwinds, including the migration of Russian carriers, notably Aeroflot and Rossiya, and sale of AirCentre. 
  • The analyst found it challenging for Sabre to remain competitive given its liquidity concern, deeper cost cuts, and ongoing IT transformation. 
  • The price target reflects lower growth near-term and a higher WACC of 10.4% (from 9.5%). The Q4 recovery is relatively muted overall. 
  • In the U.S., recovery has somewhat stagnated, with Winter Storm Elliott leading to canceled flights in the last ten days of December. 
  • EMEA bookings were sluggish due to lower intra-Europe bookings. 
  • APAC recovery gained momentum, with many regions improving but partially offset by operational cutbacks in Australia. 
  • The BofA economists now expect a very likely recession in the U.S. and Europe. Nonetheless, the reopening of Asia and a still-nascent corporate travel recovery are likely to offset the impact of a downturn partially.
  • In 2023, Cheng expects Etihad AirwaysHawaiian Airlines, and ITA Airways to migrate away from Sabre. 
  • However, the planned merger of Spirit Airlines, Inc SAVE (Amadeus customer) with JetBlue Airways Corp JBLU (Sabre customer) can more than offset these losses if Spirit migrates to Sabre.
  • Price Action: SABR shares traded lower by 7.93% at $6.39 on the last check Wednesday.
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