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Cheap Tickets, Cheap Shares

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 that 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.