January 25, 2024 | Posted in News
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The travel industry offers plenty of opportunities for investors and perhaps even more so when we look beyond airlines and hospitality names. One of the names that could provide a more guarded investment opportunity is Amadeus IT Group, S.A. (OTCPK:AMADF) (OTCPK:AMADY). Since this is my first time covering Amadeus, I will briefly describe the company’s activities followed by a discussion of the most recent results and conclude the report with a price target and rating for Amadeus stock.
Amadeus IT Group is a Spanish IT company connecting travel content in its computer reservation system. The travel content is not limited to selling airline tickets but also includes hotel, ground transport, distribution services and insurances. You can view companies such as Amadeus as the backbone of travel IT. The Amadeus GDS (Global Distribution System) is the biggest, with two alternatives being the Sabre GDS and Travelport.
Amadeus derives a significant portion of its revenues from transactions. When its system is used to make a booking, a booking fee is charged which goes to Amadeus. So, Amadeus is not a fully shielded travel investment opportunity in the sense that revenues derived from booking fees will fluctuate with demand for travel and lodging, but I think over the longer term Amadeus does have a nice business. Global systems and IT are becoming more and more prominent and they also help connected parties incrementally improve revenues. So, I believe there is upward pressure.
Amadeus reports its business through reportable segments, namely Air Distribution, Air IT Solutions, and Hospitality & Other Solutions.
Amadeus saw significant growth on all key metrics. Its revenues grew nearly 15% for the latest quarter and 23.2% year-to-date. Air Distribution revenues grew 26% to more than €2 billion, while Air IT Solutions grew 22% to €1.4 billion while H&OS revenues grew 18% to €650.4 million. The nice scalable features of the business were also clear as we saw EBITDA growth of 33.8% outpace revenue growth with EBITDA margins now standing at 39% up from 35.9%. Free cash flow growth outpaced both the revenue and EBITDA growth at a rate of 50% resulting in €940.5 million despite higher Capital Expenditures and R&D.
I am most definitely intrigued by the Amadeus IT Group business model and see significant opportunities ahead for IT solutions for travel products and services. However, after rising more than 20% over the past twelve months I don’t see much upside left for the IT travel specialist. The upside with respect to 2024 earnings is just 5 to 9 percent, and that is not enough in my book for a buy rating.
That is most definitely not to say that this stock is not a nice one to hold, because I do think there are strong prospects to hold Amadeus IT Group stock, and growing profits with 50% of the profits distributed in the form of dividends certainly do make a compelling setup to hold.
I do believe that Amadeus IT Group, S.A. has a strong moat, and while its valuation and forward projections are not adding to a strong buy thesis, I do think the strong prospects and growing profits are adding to the appeal to at least hold Amadeus stock. I would say that in case you want to have exposure to the travel industry but not directly via investment in hotels and airlines, Amadeus, which controls the biggest global distribution system, is a nice way to have some exposure.