TAKING STOCK

Dear Mr. Berko: I’ve been getting a half-dozen travel advertisements every week on my e-mail from Travelocity.com, offering all sorts of travel bargains. These people do an enormous amount of advertising, and business must be pretty good. Is this the same company that is owned by Sabre Holdings, and if it is, would you recommend that I buy Sabre stock, which is at $20, the lowest price I’ve seen?

Please tell me about Travelocity or Sabre and give me your recommendation. If you think there’s a good opportunity to make a 25 percent to 50 percent return on the stock in the next 12 months, I’d buy 200 shares.

G.E.  Kankakee, Ill.

Dear G.E.: Sabre Holdings (TSG-$20) was a wholly owned division of American Airlines until October of 1996, when TSG completed an initial public offering at $27 a share and began trading on the Big Board. Yes, Sabre Holdings owns the Web site Travelocity.com, which spams your e-mail in-box a couple of times a week, touting very low-priced travel packages.

The company has network links to 135,000 terminals in travel agencies across the country, and they also pay enormous sums of money annually to providers like Bell South for your business and personal e-mail addresses. So, in addition to agency terminals, Sabre spams over 12 million individual computers (like yours) with unwanted come-ons or travel specials, and it’s almost impossible to stop their advertising from cluttering your computer.

Between 1996 and 2000, TSG’s revenues grew from $1.6 billion to $2.6 billion, while net income increased from $1.40 to $2 a share. By mid-1999 TSG’s net profit margins rose to 11.2 percent and its stock price almost tripled to $72 in June of that year.

While revenues rose in 2000 to $2.6 billion, the company lost its profit focus, wasted funds on nonproductive ideas, raised salaries, spent millions on ridiculous advertising and added redundant staff while management abused perks and expense accounts. TSG’s net profit margins collapsed to 9.7 percent and the shares tumbled to $44.

The following year wasn’t much better. Net-profit margins plummeted to 7.4, percent and the World Trade Center catastrophe scuttled revenues by 20 percent to $2.1 billion, forcing the shares to fall to an all-time low of $14 in 2002.

Sabre’s airline ticketing revenues are expected to be lower this year than 2002. Its car rental franchise, hotel reservations, limousine bookings, tour operations, cruise line revenues, travel agency charters, corporate travel business and hardware/software division (service and technology for the professional travel industry) will all report lower revenues in 2003.

Certainly a tepid travel market has placed a damper on TSG’s revenue and income growth in 2002, 2003 and 2004. Air travel revenues have dropped significantly because of a weak economy and uncertain international political events. Corporate travel budgets have been slashed to the bone. Airlines like American, Continental, United, etc. have reduced capacity again, hindering TSG’s top line and margins.

Meanwhile, TSG will get slammed by federal deregulation of travel distribution. The Department of Transportation has given airlines the flexibility they want to distribute tickets as they see fit. In other words, carriers with ownership positions in other distribution systems don’t have to participate equally in competing systems. This move greatly increases the airlines’ bargaining positions with TSG and will allow carriers to book more profits from the same ticket sale.  TSG has a war chest of over $1 billion in cash on its balance sheets, no preferred shares outstanding and common stock represents an impressive 81 percent of capital.

However, management will spend about $175 million of that cache in new technology and expand its obnoxious e-mail marketing program.

I believe that revenues and net income will rise in 2004 and beyond, but I also believe those increases will be singularly unimpressive, especially considering the doubtful viability of several carriers and cruise lines. Revenue and earnings growth will also be truncated because of pricing pressures from the hotel industry and tour operators as well as the airlines and cruise ships.

While the shares trade right on book value, I can’t get keen on this stock. Even though the shares have collapsed to $20 and TSG has $1 billion in the bank, I would go to great lengths to avoid this stock.  Oh, and by the way, if you want to get rid of the Travelocity garbage on your e-mail, write Sabre Holdings, 3150 Sabre Drive, Southlake, TX 76092 and tell him what you think.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or visit his Web site at www.berkoradio.com.  (c) Copley News Service  Visit Copley News Service at www.copleynews.com.