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Online Travel Shares Find Room for Upside

Expedia's huge second quarter caps a sectorwide rally.
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Updated from 5:23 p.m. EST

A sharp rally in the shares of online travel companies was capped after the bell Monday by a huge upside earnings surprise from

Expedia

(EXPE) - Get Report

.

Expedia said it earned $19 million, or 31 cents a share, before various expenses in its fiscal second quarter, compared with a loss of $2.6 million, or 6 cents a share, a year ago. The company's revenue shot up to $81.7 million. Analysts had been expecting earnings of 10 cents a share on revenue of about $70 million.

"We accomplished these record results in spite of the travel slowdown caused by the economy and the events of Sept. 11," Gregory Stanger, the chief financial officer of Expedia, said in a statement.

For the first time, the travel company posted a profit, using generally accepted accounting principles. On that basis, it earned $5 million, or 8 cents a share, reversing a loss of $25 million, or 53 cents a share, a year ago.

Expedia's much better-than-expected results can be attributed to growth in merchant revenue, which comes from package deals with hotels and airlines. That figure rose to $34 million, up 185% from last year. Agency revenue, which is made up of commissions on air ticket sales, increased to $42.3, up 75% from a year ago. In the third quarter, Expedia expects revenue of $87 million, compared with analysts' forecasts of $77 million.

The sector got a boost earlier Monday after discount hotel room seller

Hotel Reservations Network

(ROOM)

reported quarterly earnings that beat expectations. The company also raised its guidance for 2002.

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The

USA Networks

(USAI) - Get Report

unit earned 27 cents a share in the fourth quarter of 2001 before charges, surpassing forecasts for a profit of 17 cents a share and topping the year-ago 22-cent result.

Revenue was $141.7 million, up 42% from $100 million last year. After the charges, net income fell 7% to $4.8 million, or 8 cents a share, from $5.2 million, or 9 cents a share, last year.

The stock rose about 18% in the regular session, while

Travelocity.com

(TVLY)

gained about 16%. Expedia tacked on about 7% in regular trading.

Since Sept. 21, HRN is up 163% amid a rally in Internet travel firms. "This was a spectacular quarter for them," said Underwood. With the stock up so much, however, further upside could be limited: "The stock might take a breather," said Scott Barry, an analyst at Salomon Smith Barney. "But with travel shifting online, I'd want to be exposed to it."

Hotel Reservation Network said the number of room nights sold jumped 70% to 1.19 million in the fourth quarter, though prices were lower. "Not only did HRN's bookings rebound quickly in the fourth quarter, but we exceeded our pre-Sept. 11 outlook in a year when many in the travel sector suffered," said David Litman, chief executive of Hotel Reservation Network, in a written statement.

In the fourth quarter, major airlines eliminated over 20% of their scheduled flights, due to a slump in travel. And hotels, on average, reduced rates by 17% over the same period. Hotel Reservation Network said its business has been affected by lower prices. But the company said it's well positioned for 2002.

"As room rates begin to increase over this year, we'd expect to benefit even more from high growth in our transaction volumes," Litman said. For 2002, HRN expects adjusted earnings per share of $1.30, above forecasts for $1.02, on revenue of $775 million, higher than estimates for $660 million.