Description

Founded in 1986, Cheap Tickets, Inc. is a leading retail seller of discount travel products and services on and off the Web. The company sells discounted airline tickets, cruises, hotel accommodations and car rentals, offering more than 425,000 non-published discount airfares on more than 35 air carriers. Cheap Tickets sells directly to consumers through its toll-free number, 1-800-OKCHEAP, its Internet site, www.cheaptickets.com , and its 12 retail stores.

CTIX is the only seller of non-published airfares online (with the possible exception of Priceline.com). CTIX thinks that as long as there are empty seats on airplanes, there will be discount fares available to companies like CTIX. Currently, 700,000 airline seats, or 30% of airline capacity, remains unfilled per DAY!

REASONS WHY THE MARKET SHOULD LOVE CTIX
Unlike its peers (Travelocity, Expedia, Priceline), CTIX is quite profitable. Its 25% top line growth (q200 over 2q99) is fueled by sharp sequential increases in its internet business and 22% growth in call center volume. The internet now acounts for 40% of gross revenues, up from 29% at December 31, 1999. CTIX has added roughly 4.4mm registered users in the first 9 months of 2000, up from 2.6mm as of January 1, 2000.

CTIX only spends $1.00 to obtain $40.00 in gross bookings and boasts a 40% repurchase rate. Now for the punchline. CTIX has $6.65/diluted share of cash in the bank ($157mm.), yet the stock has based in the mid 10's. A thought - the interest on the cash alone at 6.5% yearly is worth $10mm to the company. With no debt, the enterprise value is a paltry $93.8mm (or 2.67 times enterprise value).

The contrast in the valuations of CTIX relative to peers like Priceline.com is simply amazing. For PCLN, which has a 3.3Bn market cap (12x CTIX), investors get; $50mm in losses (despite 500% top line acceleration), with the potential for profitability in 2002, negligble tangible book value, razor thin gross profit margins, roughly $1.00 of advertising for $10.00 in projected sales of 1.2BN (2.5-3.0 times sales valuation), and negative EBITDA. The comparisons to Travelocity and Expedia are even more ludicrous from a security analysis standpoint.

POSSIBLE REASONS WHY CTIX TRADES IN THE MID 10's
1) Confusion in the media and lack of awareness - There is seemingly a story about online travel in the popular press every day. CTIX almost never is mentioned in any such stories, rarely if ever appears on CNBC, and is regularly downgraded and forlorn by the midtier investment houses that brought them public at $15 in mid 1999 AND did a secondary at $38 during the last 12 months.

2) The confusion is exacerbated by comments such as these: "Individual airline Web sites now account for more than half of online ticket sales, but that will drop to below 50 percent by 2001 and continue to fall through at least 2004.....xxx expects online ticket sales to more than triple from over $5 billion in 1999 to over $18 billion in 2004. Obviously 35% of $18BN is substantially more money than one half of $5BN. However, the sentence paints a potentially damaging picture of the future of the online travel business.

3) The possibility that orbitz.com, a website owned by several major airlines, will be substantial competition to CTIX. However recently, the orbitz.com project was shelved, with possible Justice department concerns cited.

4) Internet companies are presently out of favor (CTIX is down 70% for the year).

5) Possible continued overhang from secondary and IPO lock up expiry, as stock may have been placed in weak hands. Notably, management owns roughly 1/2 of the total shares outstanding.

Catalyst

We see three main drivers for the near and long term valuation of CTIX

1) Increased exposure to the investment community and brand building. Counter to its competitors, CTIX built the business first, and is now focusing on the brand. The hiring of key executives with marketing, sales and Wall Street experience should expedite this process.

2) Earnings, earnings, earnings. With the explosion of new registered users, and historical client retaention rates, we expect CTIX to near, if not eclipse its already rock solid numbers in the quarters ahead. The wind is at their backs.

3) We see CTIX as a possible acquisition candidate for one of the more well known peers who will need to accelerate top line growth and actually make a profit.