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Expedia Takes a Beating

The stock slides 16% after a lackluster outlook.



plunged 16% Thursday after the online travel company reported disappointing fourth-quarter results and offered lackluster guidance.

The Bellevue, Wash., company made $25 million, or 7 cents a share, for the quarter ended Dec. 31, down from the year-ago $44 million, or 13 cents a share. On a so-called adjusted basis, excluding certain costs, earnings dropped to 20 cents from 27 cents a share a year earlier, missing the 26-cent Thomson Financial estimate.  Sales rose 13% to $494.7 million, helped by acquisitions and gains in the hotel business, but fell short of the $505 million consensus forecast.

"Expedia reported a quarter that missed expectations modestly, coming in about 3% light across relevant metrics such as gross booking, revenue, and operating income," writes Scott Devitt, an analyst with Stifel Nicolaus, in a note to clients Thursday. "More importantly, the company presented an outlook that will not be viewed positively by investors. Expedia noted investment in the business would drive negative operating income growth in the first half of 2006."

Devitt reiterated his buy rating on the shares but lowered his target price from $26 to $24. Analysts at Lehman Brothers, Merrill Lynch and Soleil Securities downgraded the shares, which fell $4 to $20.25.

Expedia was hurt by declining market share in the U.S,  a slowdown in international revenue and rising expenses, says Merrill's Justin Post in a note to clients. He said the reasons why this occurred weren't fully explained during the earnings conference call.

 Though Expedia's valuation remains attractive on a free cash-flow basis, "we see fewer catalysts relative to large-cap Internet peers which are also down 10-25% year to date," writes Post, who cut his rating on the shares to neutral from buy.

Expedia will be spending this year trying to better position itself in the $800 billion global travel business, a move that's applauded by Bear Stearns analyst Robert Peck, who rates the shares peer perform.

"We believe this is the right thing for the company to do as it sees mounting online competition, constrained supply, supplier competition and pricing pressures," Peck writes in a note to clients.