The arrival of my children has been, without a doubt, one of the best things that has ever happened to me. And while my wife claims I've picked up a few bad habits from the joys of parenting, like doing a Wiggles dance in public or orchestrating belching contests, I've learned more than I could have ever imagined from my children. So with that, I'd like to share some of those lessons and see if we can apply them to investing.
Lesson No. 1: Costumes rule
With kids, it's a no-brainer: The crazier you look, the bigger the reaction. The same holds true in investing, because great opportunities can arise when a company's hidden value is disguised. In fact, my favorite investing style is tracking a company that has fallen prey to the Street's pessimism.
Last year, pessimism was rampant in the travel industry. Between record oil and fuel prices, hurricanes, wars, and airline bankruptcies, it appeared to be a waste of time to throw your money into this industry.
It was at that time I starting paying a little closer attention to the relentless beating SabreHoldings
With increased competition from Priceline.com
Lesson No. 2: In one ear...
While the Street and economic gurus focused on a bleak future for the travel industry, the summer's good news seemed to be going in one ear and out the other. The Fourth of July produced record travel numbers despite unattractive conditions, and Thanksgiving travel exceeded pre-9/11 levels. In addition, corporate travel hasn't slacked off as expected, and the recently announced consumer confidence numbers could further fuel the industry. To me, it appears certain players in the travel industry may have been counted out a little too early.
Lesson No. 3: Crawling, then walking
A good sign that the fog is clearing for the entire online travel business is found in both increasing revenues and bookings. And while I believe Travelocity is building a better travel platform, I think it's important to examine how competitors have fared, to see if this previously crawling industry can finally run.
Last quarter, Expedia reported a 16% increase in revenues and a 21% increase in gross bookings. Priceline's gross travel bookings were up 40.4%, with revenues increasing 9.7%. Cendant also showed strong gross bookings of 15%, with revenues climbing 48% -- although revenues included the newly acquired Orbitz businesses.
Lesson No. 4: Growth spurts
As with any company on the mend, increasing revenues are a good sign that wounds may be healing. Sabre's revenues year to date have been stellar, climbing 16.3% to $1.90 billion from $1.64 billion, with all three divisions improving. The largest division, Sabre Travel Network, performed the worst with only a 3.8% increase in revenues; Travelocity continues to dominate and delivered a 58.1% rise in revenues; and the Sabre Airline Solutions group had a modest 8.9% boost in revenues.
While Travelocity has been growing at a phenomenal rate, at more than 30% for the last two quarters, the recent addition of Lastminute.com, Europe's largest online travel system, has quickly added top-line growth to an already strongly growing segment. The addition last quarter added 36% to Travelocity's total revenues -- a cool $100 million. Travelocity is clearly one of the biggest reasons I like this company, and with Lastminute.com, its penetration into online, international, and corporate markets should continue to boost revenues.
Lesson No. 5: Teething is painful
Teething is a very painful part of childhood, but it's inevitable. So here are a few reasons why Sabre's growing pains may linger. While both Travelocity and Sabre Airline Solutions have boosted operating income, the Sabre Travel Network's performance has been dismal, with year-to-date declines of 10% in gross profit and 16% in operating income. The Sabre Travel Network segment can't avoid facing airline consolidations and the likely expiration of contracts, which could further hit top-line growth.
Lesson No. 6: Freedom is never far away
Parents dream of the day when their kids leave the roost. And for Sabre, it appears they are getting ready to fly. Back in December, Sabre gave some pretty impressive financial guidance on how it would fare in 2006. Sabre projected 2006 revenue to come in near $3 billion, a 15% increase year over year, with earnings per share coming in above analyst expectations at $1.70. Free cash flow is expected to more than double that of 2005, reaching at least $300 million, and earnings before interest, taxes, depreciation, and amortization is expected to grow 25% over last year, reaching more than $500 million. All in all, business appears good, and as expected, Travelocity will deliver revenue growth of more than 40% year over year.
Lesson of a lifetime
Learn to follow your heart and love your kids. This year some of my "kids" with great potential got trashed as investors tuned into the Street's pessimism. But by being patient and letting the Street do all the work, Sabre's hidden value may finally be harder to disguise. And while some of you may be disgusted by how low some of those tickers can go, I say: Bring it on.
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