Despite the war -- and a drop in travel since September 11 -- LodgeNet Entertainment (LNET ) scored record earnings in the fourth quarter of 2002 and is set for a happy surprise in first quarter, 2003. LodgeNet is the No. 1 provider of interactive TV to hotels, whose occupancy rates have dropped. As check-ins slowed, LodgeNet shares tumbled from 20 in May to 4.80 in October. But in February, the stock started to climb, reaching 9.32 on Mar. 26. "More investors understand that although fewer people travel, they spend more time in their rooms -- watching the hotel's TV," says Jonathan Cohen of JHC Capital Management, which has bought shares.
With LodgeNet's financial strength, long-term contracts with big hotels, and undervalued stock, it's "an attractive buyout target for Walt Disney (DIS ) or Viacom (VIA )," says Cohen. Such companies, he argues, seek new outlets for their products, and "LodgeNet's dominance offers an opportunity." In a buyout, he figures the stock is worth 18. LodgeNet provides movies, music videos, video games, and Internet access to more than 5,000 hotels. In 2002, sales jumped 8%, to $235 million, and earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 7%, to $81.9 million, or $6.82 a share. In 2003, Cohen figures sales will hit $261 million and EBITDA $91 million, or $7.34 a share. LodgeNet has been converting its systems from analog to digital, which delivers more movies at once -- and higher returns. Analyst Anthony Gikas of U.S. Bancorp Piper Jaffray (USB ) rates LodgeNet outperform. U.S. Bancorp has done banking for LodgeNet.
Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial