For Subscribers

Get the complete article now!

Leading analyst and top management from nine sector firms examine the online travel sector in this special 37-page report from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info558.htm.

TWST: Would it be fair to say that online travel services is the success story of Internet commerce?

Mr. Fuller: Absolutely. Travel is the largest retail category on the Internet and one of the groups to actually achieve broad success in terms of profitability. All of the public companies in the group actually turned profitable in 2001. So online travel is big (3 times the sales of books, CDs and clothes combined), growing rapidly (15% plus over the next decade), and profitable (no distribution centers or inventory to support).

TWST: What has been driving the success of this sector?

Mr. Fuller: First, travel is the ideal “virtual product.” Unlike books or groceries, the retailer does not need to maintain any distribution centers or inventory. Travel is really an electronic product, which makes it profitable to sell. Second, the online retailer shifts power from agents to consumers. Travel pricing has always been murky at best, but now the consumer has access to real-time pricing and availability information and does not have to rely on an agent. Finally, suppliers have made better prices available over the Internet. Online travel is now a 20 billion plus segment, close to 10% of the total travel market. How do you invest in that? It is no secret that online travel is successful and valuations have risen dramatically as a result. From my vantage point, companies like Expedia, priceline and Hotels.com are all very attractive businesses, with appealing growth prospects, but prices have moved to levels we generally view as full. In specific, we are neutral on Expedia and Hotels.com. priceline is a different story. They have not performed as well recently as the other two, but the stock is valued at a sharp discount and we expect performance in its lagging ticket business to improve.

TWST: Looking at the large hotel corporations in your coverage, Hilton, Starwood and Marriott, how do they look to you today and how would you differentiate among the three as investments going forward?

Mr. Fuller: I would look to focus on Starwood (NYSE:HOT), which appears to be the most highly leveraged to the industry recovery and might be in a position to capture market share. Starwood bought its flagship brands, Sheraton and Westin, in the late 1990s and has deployed significant capital to upgrade both. We expect that investment to yield big dividends over the next several years. What it all boils down to is growth. We expect this company to outpace the other big chains.

TWST: Jake, what kind of time frame should an investor have, as a general rule, when they buy hotel stocks?

Mr. Fuller: Remember, these stocks have significantly outperformed the market, so I would argue that performance could be volatile in the short term. So an investor should be willing to hold these stocks for a year or more.

TWST: And the risks to owning these stocks?

Mr. Fuller: I think the risks are pretty clear. The market has built in some fairly high expectations at this point. The market is expecting this recovery to continue at a fairly rapid pace. So there is a risk that the broader economic scenario does not unfold as anticipated. There is also the risk we cannot quantify — further attacks or negative developments in the war effort.

This special report includes:

1) Online Travel Retailers - In an in-depth (2,200 words) Analyst Interview, Jake Fuller, Hospitality Research Analyst covering the lodging, online travel and travel distribution groups at Thomas Weisel Partners, examines the outlook for the sector and share specific stock recommendations.

2) CEO interviews (average 2,500 words). Top management of nine sector firms examine the outlook for their firm and the sector.