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Cheap Tickets’
stock dives despite
good earnings

The company saw its net rise
53 percent in the second quarter

By Russ Lynch
Star-Bulletin

Shares of Cheap Tickets Inc. dropped 7.6 percent today despite a glowing earnings report issued late yesterday.

Citing successful advertising campaigns and new alliances with airlines and other travel providers, the company reported a second-quarter profit of $4.9 million, up 53 percent from $3.2 million a year earlier.

Per-share income for the Honolulu-based seller of discount travel was cents, up 40 percent from 15 cents in the year-earlier quarter. That was in line with the estimates of four Wall Street analysts. Two had predicted 21 cents while the other estimates were 20 cents and 18 cents.

The company's stock sank $1 to close at $12.50 today on the Nasdaq market. The company issued its earnings report after the market closed yesterday.

Investors were apparently reacting to a new estimate by a Minneapolis analyst, who lowered his outlook for the stock to "neutral" from "buy-speculative." George Sutton of Dain Rauscher Wessels issued a report saying Cheap Tickets' call-in centers are not able to hire enough workers to keep up with rapidly growing demand.

Still, two other analysts who follow the company said Cheap Tickets' shares do not get the action they deserve because although it does a large amount of its business on the Internet, the company is unfairly lumped in with a different type of Internet travel business.

Cheap Tickets is "one of the more misunderstood smaller companies," said Carson Block, an analyst with WAB Capital in Los Angeles. "There's a negative overhang affecting the stock," he said today.

Stories about an airline consortium launching a discount-ticket Web site called Orbitz and about another upcoming travel Web site, Hotwire, have confused investors, he said. "People don't understand really what Cheap Tickets does," Block said.

He said there are good reasons to invest in the company. "One of the compelling reasons to own the stock is I feel it is pretty recession-resistant," Block said. When the economy turns sour, airlines have more seats to sell and that creates more product for Cheap Tickets to move, he said.

Barry King at EarlyBird Capital in New York said Cheap Tickets gets an unfair rap because it is different from most Internet companies. "They're profitable and they've got a lot of cash in the bank," he said.

Cheap Tickets reported net revenues of $128.7 million in the three months through June 30, up 25.4 percent from $102.6 million in the year-earlier quarter.

Net revenues were made up of $5.2 million in commissions Cheap Tickets received as a travel agency, selling airline, cruise and other services for the providers, and $97.4 million from its basic business, selling discount air tickets.

Cheap Tickets has arrangements with more than 35 airlines to sell seats the airlines themselves have not sold as the flight date approaches. The company sells them for well under published fares and pays the airlines heavily discounted wholesale prices.

Cheap Tickets also is a travel agency, selling reservations at published rates for airlines, cruise operators, hotels and other travel services. Commissions from those operations can run as low as 5 percent of the ticket price.

The company's Internet gross bookings -- the total face value of all the tickets sold regardless of whether they were commission-only or wholesale-to-retail markup deals -- almost doubled to $75 million in the latest quarter from $38.5 million in the year-earlier period.

At the end of June the company's Web site, www.cheaptickets. com, had reached 5.9 million registered users, compared with 1.2 million the same time last year.

The company also said it recently passed the 6 million mark.