Over the past six months, Sabre’s shares (currently trading at $1.51) have posted a disappointing 16.9% loss while the S&P 500 was down 2.1%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Sabre, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Sabre Will Underperform?
Even though the stock has become cheaper, 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. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Sabre grew its sales at a 15.7% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 3.6%, meaning it lit $3.64 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 $4.35 billion of debt exceeds the $910.1 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $500.2 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
Sabre doesn’t pass our quality test. Following the recent decline, the stock trades at 6.9× forward EV-to-EBITDA (or $1.51 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 recommend looking at one of our all-time favorite software stocks.
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