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Betting on Barry
InterActive is an online travel leader. So why does the stock trade at a big discount to other Nets?
February 6, 2004: 12:12 PM EST
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Is there such a thing as a cheap Internet stock?

Amazon.com, Yahoo! and eBay continue to trade at scary earnings multiples, with an average P/E of 66, based on 2004 earnings estimates.

That makes InterActive Corp, which trades at 33 times 2004 earnings estimates, look like a relative steal by way of comparison.

"Obviously, cheap is not a good word. But InterActive is a value oriented Internet stock if you will," said Chris Staneluis, portfolio manager with the Armada growth funds, which owns the stock in the Armada Large Cap Growth, Armada Mid Cap Growth and Armada Large Cap Ultra funds.

If the name InterActive doesn't ring a bell, odds are many of the online properties the company owns do: Expedia, Hotwire, Hotels.com, Match.com, Citysearch and Lending Tree. The company also owns the Home Shopping Network and Ticketmaster.

InterActive, formerly known as USA Interactive, is controlled by media mogul Barry Diller. The company sold off its USA Networks properties in 2001 and is now focused on becoming a leading provider of consumer Internet services.

But investors have soured a bit on the company recently. While the other three big Net stocks are up, on average, 35.7 percent over the past six months, shares of InterActive (IACI: Research, Estimates) have fallen nearly 13 percent.

Concerns about the travel biz

Steve Weinstein, an analyst with Pacific Crest Securities, said that investors are a bit concerned about the prospects for InterActive's travel-related businesses, which accounted for 46 percent of the company's total revenues and 72 percent of operating income in the third quarter.

Sites like Expedia and Hotels.com act as a middleman for booking travel arrangements, buying tickets or rooms and reselling them. But the company continues to face tough competition from the likes of Priceline.com (PCLN: Research, Estimates), Sabre Holdings (TSG: Research, Estimates) (which owns Travelocity) and Orbitz (ORBZ: Research, Estimates), the online travel group owned by a consortium of airlines.

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In addition, as the online travel industry continues to grow, the airlines and hotel companies could seek to capture more of this growth without middlemen.

"The biggest issue for investors is concern about the airlines and lodging industry trying to capture more discounts rather than going through third parties," said Matthew Harrigan, an analyst with Janco Partners.

Weinstein thinks InterActive needs to give more information about the long-term nature of its agreements with airlines and hotel companies (i.e. how much inventory will be available and at what type of prices) in order to allay the market's fears about profit margin erosion.

Strong earnings could be a spark

More details could come as soon as Monday morning, when InterActive reports its fourth quarter results. Analysts are expecting a strong quarter, with projected earnings of 23 cents a share, up from 17 cents in the fourth quarter of 2002. Wall Street is also predicting a 33 percent jump in sales, to $1.78 billion.

If InterActive delivers a blowout quarter, that could lift the stock out of its funk. But even if it does, analysts don't expect InterActive to trade at the type of premiums awarded to Yahoo! (YHOO: Research, Estimates), eBay (EBAY: Research, Estimates) or Amazon.com (AMZN: Research, Estimates).

InterActive will probably continue to suffer from the perception that it has built itself mainly through buying other companies and has yet to demonstrate strong organic growth.

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That said, InterActive's discount appears a bit excessive. "The Street is always wary of companies patched together through acquisitions," said Harrigan. "But it's remarkable to me how some stocks that are speculative have done very well and yet InterActive, which is putting up pretty good numbers, is very much in the penalty box."

Diller said during the company's third quarter conference call that InterActive was not planning on doing as many deals this year as it has done during the past few years. If he lives up to that promise, this could help since investors might be more inclined to focus on how the acquisition strategy should lead to healthy levels of growth.

"The valuation is really attractive compared to everything on the Internet," Weinstein said. "I think there's a floor for the stock when people are willing to bet on the longer-term."

And Staneluis thinks that shares have already hit that floor. "The bottom line is I think Diller has got it right," he said. "The stock is already discounting a lot of bad news."

Analysts quoted in this story do not own shares of InterActive and their firms have no investment banking relationships with the company.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.