The Morning Report - December 12, 2000

http://www.internetstockreport.com/column/article/0,1785,1661_532571,00.html


Cheap Tickets, Cheap Shares

By Chris Nerney

It's an e-tailer that still derives most of its revenue from non-Internet
sources, which, along with the amusing ads featuring William Shatner,
might explain why it has gotten less publicity (or notoriety) than chief
competitor priceline.com.

But though Cheap Tickets may have no high-profile celebrity pitching its
low air fares and hotel rooms, the Hawaii-based company does have one
thing for which priceline.com and its investors would no doubt pay dearly:
profits.

In fact, CTIX has run in the black for seven straight quarters, the most
recent (Q3) showing net income of $4.3 million, or 18 cents per share, on
revenues of $121.4 million.

In contrast, priceline.com, with much higher revenues of $341 million in
the third quarter, turned in a loss of $199 million, or $1.19 per share.
Last Thursday, the troubled "name your price" e-tailer announced yet
another round of layoffs and the cancellation of plans to expand its
services.

And while PCLN has been one of the biggest busts among 'Net stocks this
year - down 95% through Monday's trading, despite surging up 30% after
last week's news - Cheap Tickets shares have declined by only about
one-third since Dec. 31, closing Monday at $8.75.

Which could mean there's more downside coming for CTIX. However, the
company's highly favorable valuation should provide enough buoyancy to
prevent much more stock-price erosion. With a market capitalization of
$218 million, Cheap Tickets is valued at 0.5x trailing 12 months' revenue
of $416.5 million. That's the best revenue-multiple valuation I've ever
seen among profitable Internet companies.

Of course, as mentioned earlier, Cheap Tickets really isn't a pure
Internet play. Begun in 1986, the company's prime business - which
accounts for 94% of sales - is to purchase non-published air fares from
the carriers and re-sell them at a discount to consumers. Up until 1997,
all of its sales came through four call centers and a dozen retail
outlets.

This changed in 1997, when CTIX launched its cheaptickets.com Web site. By
last year's third quarter, 27% of sales came via the Internet. That
increased to 37.4%, or $45.4 million, in the recent third quarter.

Further, while Internet-based revenues are rising both on a dollar and
percentage basis, call center and retail revenues actually are declining
on a dollar basis as the company focuses more on the Web, a strategy shift
that has been accompanied by higher gross margins.

All of the above are good reasons to expect CTIX shares to rise. Now
here's why I don't expect them to rise too far.

The main problem is a severe slowdown in revenue growth. Sales in the
recent third quarter were just 10% above last year's Q3, down from Q2's
25% year-over-year revenue increase, which was way below the 65% increase
in first-quarter sales. Granted, the increase in Internet-based revenue
for Q3 was 53% over the year-ago period, but even that number isn't
eye-catching among 'Net investors.

Then there's the threat of competition, including Hotwire.com, a discount
travel Web site start-up that is being supported by a six major airlines.
Other airlines also should be expected to get more directly involved in
selling unsold and unpublished air fares, a trend will put even more
pressure on Cheap Tickets to develop other revenue sources.

With viable options for 'Net investors seemingly shrinking on a daily
basis, Cheap Tickets is definitely worth a look. It is profitable and its
shares affordable, which bodes well should a larger player eventually
scoop up the company.

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