Sabre: Debt Levels Are A Concern But At These Price Levels, It May Be Worth The Risk

In my first and so far only coverage on Sabre Corporation (NASDAQ:SABR), where I interned 15 years ago, I rated the stock a Hold but acknowledged the company was struggling on many metrics. Since then, the stock has lost further ground, losing 13% compared to the market’s 6% gain. Ouch! A nearly 20% underperformance despite being down 25% in the last one year at the time of my previous article. I wanted to update investors in this follow up as nearly 3 months have passed and the stock seems to be in further pain.

Have things worsened fundamentally? Let’s take a look as I evaluate the same factors used in the September article. Let us get into the details.

Free Cash Flow Disaster

To reiterate what I stated in my previous coverage on Sabre, I tend to start my analysis of most small caps with Free Cash Flow [FCF] for two reasons:

1. Earnings can be skewed upwards or downwards by one-offs.

2. FCF is one of the simplest and powerful metrics to estimate a company’s core operating strength. It is basically the cash a company has left from its regular business operations after deducting expenses that support its operations.

We established in the September review that Sabre’s FCF over the last 5 years was nothing short of a disaster. Thankfully, the company is well aware of this and has openly called out FCF improvements as one of its strategic priorities. In what may be an early encouraging sign, Sabre reported nearly $39 million in Q3 FCF, which is the highest since, wait for it, December 2019. However, two out of the last four quarters have reported positive FCF, lending credibility to the company strategizing its priorities and executing on those priorities.

Debt Mountain

Sabre’s debt has inched up a hair since my last article, from $4.79 billion to $4.82 billion. Thanks to the near 15% hair cut in share price since September, Sabre’s debt to market capitalization ratio has worsened to 3.30:1 (from 3:1) and is still easily one of the highest I’ve seen since I started analyzing small caps on Seeking Alpha.

As a result of the slight uptick in debt and increasing interest rates, Sabre paid $119 million towards interest expense on debt in Q3, up $13 million from Q2. In other words, should this trend continue, the company is likely to pay roughly 1/8 of its overall value towards interest expense each quarter ($119 million divided by $1.47 billion market cap). It is important to note that interest expenses do not impact FCF and hence it is not surprising how the company reported its highest FCF in 4 years while simultaneously paying its highest ever interest expense.

But Wait, There Are Signs Of Life, Still

While I continue to be concerned with Sabre’s business and debt woes, especially the latter, we still have positive a few recent positives.

• Sabre’s Global Distribution System [GDS] gained market share in Q3 as well, marking it the third consecutive quarter of gain. The company is also leveraging AI and ML through its partnership with Alphabet Inc. (GOOG) to improve its GDS, hotel distribution, and retailing systems.

• Thanks largely to its cost-cutting initiatives, Sabre’s EBITDA more than tripled in Q3 2023 on a YoY basis. Once again, this does not include the company’s interest expenses (covered above) but is a step in the right direction. The company was quick to highlight that in its Q3 presentation as shown in the first chart below. The second chart shows that this is the first quarter in December 2019 that Sabre’s quarterly EBITDA crossed the $100 million barrier.

• Sabre’s Q3 seems like an inflection point based on the numbers above (apart from debt) and the company, of course, highlighted the same in its Q3 presentation. For example, the company reported positive numbers and 100% YoY growth in many areas including operating income, adjusted EBITDA, and cash from operations. While Sabre did refinance near-term debt, that is just kicking the can down the road. Debt may end up sinking the company before the turnaround completes.

• Lastly, from a technical perspective, unlike last review where the stock was trading above its 100-Day moving average, SABR is now trading below both the 100-Day and 200-Day moving averages. However, this time around, the 200-Day moving average is much closer to the current market price (4% difference) suggesting long-term support is nearby. The 200-Day average has shifted significantly lower compared to the previous review.

Conclusion

At the end of the day, I’d have to agree with Seeking Alpha’s rating (rather, warning) below that the stock is at high risk of performing badly, despite already losing 36% over the last year. However, I am sticking with my “Hold” rating on the stock and buying around the $3 area may reward investors in the long-run as that would represent a FCF multiple of 2 based on Sabre’s FY 2025 target of reaching $500 million FCF.

As I wrote in the September review, Sabre’s FCF is not going to move from -$55 million average/quarter to $500 million a year with no stops in between. And the stops did come in Q3 in the form of $39 million. It remains to be seen whether this becomes the new norm but early signs are encouraging with two out of the last four quarters being FCF positive. However, the debt situation is getting worse and is beyond urgent at this point. Sabre Corporation simply cannot afford to pay 1/8th of its worth in the form of interest expense each quarter. There is a real risk that the company may sink in its debt before the promising turnaround becomes a reality. However, at $3, it may be a risk worth taking.