Updated from 11:31 a.m. EDT

Hilton Hotels ( HLT) posted a better-than-expected third quarter Thursday as the cyclical travel recovery continued to barrel along, boosting occupancy and room rates.

However, like rival Starwood Hotels and Resorts ( HOT) a day before, Hilton Hotels watched its shares slump on investor disappointment with its 2006 outlook.

Although the Beverly Hills, Calif., company expects still-strong unit revenue growth next year, its earnings outlook fell short of Wall Street's estimates. Shares of Hilton Hotels were falling 68 cents, or 3.4%, to $19.13.

During a conference call, Hilton Hotels executives also declined to provide an update on talks to acquire the hotel business of Britain's Hilton Group PLC, which owns and manages the Hilton brand outside the U.S. The two companies confirmed the discussions earlier this month. Investors are waiting anxiously for details about how a potential deal might dilute their shares or boost Hilton Hotels' debt.

The company said it earned $89 million, or 22 cents a share, in the latest quarter, up 46% from $61 million, or 15 cents a share, a year before. On average, Wall Street analysts expected EPS of 20 cents, according to Thomson First Call.

Revenue totaled $1.10 billion, up 7% from $1.03 billion a year before and slightly ahead of the $1.06 billion analyst consensus.

Hilton Hotels said strong demand from all segments -- business, convention and leisure travelers -- boosted occupancy and room rates. That drove double-digit percentage increases in revenue per available room, a key industry metric also known as revpar, at many of the hotels the company owns. New York City and Hawaii remained Hilton's two strongest markets, while stragglers Chicago and San Francisco continued to improve.

Excluding hotels in hurricane-ravaged New Orleans, revpar at hotels the company owns rose 13.3% year over year. Meanwhile, margins at owned hotels rose 220 basis points to 28.8% in the third quarter from last year.

The company acknowledged that many of the hotels it owns, manages or franchises were affected by Hurricanes Katrina, Rita and Wilma, but it said insurance policies will cover property damage and lost revenue after it foots the deductibles.

Hilton Hotels estimates Hurricane Katrina lowered third-quarter earnings by a penny and will shave fourth-quarter results by the same amount.

The company expects to receive claims payments from insurers throughout 2006 and will record them as they come in, but Hilton Hotels is excluding the positive benefit of those payments from its 2006 guidance.

Looking ahead, the company boosted its full-year 2005 revpar guidance to growth of 11%, with about three-quarters of the gains coming from room-rate increases. Previously, Hilton Hotels was looking for full-year revpar growth of 9.5% to 10.5%.

Including a hit of 2 cents a share from Hurricane Katrina, Hilton Hotels said 2005 adjusted EPS would be in the low 80-cent range, below the analyst consensus for 85 cents.

The company also offered a preliminary 2006 outlook for Revpar growth of 8% to 10%, in line with the guidance Starwood offered Wednesday. However, Hilton predicts next year's earnings will fall in a range from 97 cents to $1.03, shy of the $1.04 analyst consensus.

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