The Wall Street Transcript has just published its Lodging/Hotels & Resorts issue, a report offering a timely review of the sector to serious investors and industry executives. This 49-page feature contains a roundtable forum, plus commentary from an industry analyst on the online travel and hotel reservations sector, and in-depth interviews with top management of 7 hotel companies.

The lodging industry appears to be in a recovery cycle. Occupancy rates have reached maximum levels from most perspectives. Business travel is bouncing back, and discounted rates on leisure are gone. The recovery is on track for a multiple-year period lasting at least through 2007. Our panel experts agree that this is a great time to own hotel stocks and over the next couple of quarters there should be more positive earnings surprises than negative. Topics include: C-Corps and urban hotels, Limited service and extended stay segments, Impact of the weakened dollar, Converting hotels into residential properties, Outlook for timeshare business, RevPAR growth, Competitive environment, Hotel room differentiation methods, Growth segments Industry consolidation, Online booking, Industry expansion, Stock recommendations, Stocks to avoid.

Companies include: Choice Hotels International (CHH); Fairmont Hotels & Resorts Inc. (FHR); Four Seasons Hotels (FS); Great Wolf Resorts, Inc. (WOLF); Hilton Hotels (HLT); Host Marriott (HMT); Innkeepers USA (KPA); InnSuites Hospitality Trust (IHT); Intrawest Corporation (IDR); La Quinta (LQI); Lodgian, Inc. (LGN); Marriott International (MAR); Starwood Hotels & Resorts (HOT); Sunterra Corporation (SNRR); WestCoast Hospitality Corporation (WEH). Analysts include: David B. Katz of CIBC World Markets, Rod Petrik, William Truelove of UBS Investment Research and Paul Keung of CIBC World Markets.

In the following excerpt, Paul Keung discusses the maturation of the Online Travel and Hotel Reservation sector.

TWST: What's going on in the travel distribution space? What are the key trends that you see?

Mr. Keung: Significant trends are impacting both the legacy distribution and the new online distribution channels. Let's just mention a couple of headlines. On the legacy front, major companies known as global distribution systems or GDS are faced with pressure from suppliers, namely airlines, that are looking to reduce cost or to introduce less expensive alternatives. Meanwhile, traditional agencies and GDS companies are seeking ways to maintain the current economic benefits by exploring ways to strengthen relations with suppliers. Long term, we see a changing economic model that will evolve slower than anyone would like.

In online travel, we've just been through several years of consolidation. Competition is changing and is now in the form of portals, metasearch companies and, to a lesser extent, contextual sites. These sites are building an interface geared to improve trip planning functionality. Long term, it is about driving traffic, page views and conversion.

TWST: Has the change in the economy driven the consolidation or the shakeout in the space?

Mr. Keung: The economy plays a role in determining the winners and losers. When the economic cycle presents a tough environment for online travel companies, the lower-cost providers and stronger brands gain market share. Weaker players either disappear or merge to stay competitive. Today, we already have two dominant global online travel companies - Cendant and InterActiveCorp.

TWST: As you look at those two, what are they going to become, or have they become the dominant factors?

Mr. Keung: I believe InterActiveCorp is likely to remain the industry leader in size and scale. Cendant consolidated what's left, and in a business where size matters, they will be a solid number two player for years to come. The market for domestic leisure bookings faces slowing growth, offset by barriers to entry. Corporate travel is still evolving. The land grab geographically, namely for market share and mind share in Europe and Asia Pacific, continues.

TWST: It's going to be hard for anybody to come along and challenge IAC and Cendant.

Mr. Keung: Yes. This is a thin margin business, and size matters. Site experience and technology gets commoditized quickly. Companies with the lowest cost and strongest margins simply out-invest the competition. Meanwhile, I don't expect anyone to get the cheap capital that was readily available in the late 1990s.

TWST: What is the opportunity for these two companies to expand? Is there still a lot of consumer share to be tapped to get people to shift over?

Mr. Keung: Online travel still has a lot of legs left in it. Growth will come from many fronts. First, we have the demographic play as the number of leisure trips taken increases with an aging and growing population. Second, we have a secular lever, as more booking moves from the offline to the online channel. Consumers want to book online. You get better value, more convenience and greater selection. Finally, the channel shift from offline to online will get a boost from growing broadband access or from geographic expansion.

TWST: What's the investor attitude toward this space?

Mr. Keung: Currently, we are seeing a lot of transition in the shareholder base for online travel and travel distribution. Travel was the earliest fruit harvested in the e-commerce. US growth is slowing, and penetration rates are reaching maturity. Most of the growth will come from international and corporate opportunities. Today we have a transition of shareholders from those seeking high growth to those seeking reasonable growth at reasonable prices.

TWST: So it's a transitional period.

Mr. Keung: Yes. Aside from consolidation, these stocks have done little for nearly a year. Meanwhile, companies like IAC and Cendant are faced with operating challenges, specifically related to digesting and integrating acquisitions and global expansion.

TWST: What are you telling investors to do in this space?

Mr. Keung: We have a Sector Outperform rating on IAC and Cendant. Both companies offer attractive secular growth in online travel and, more importantly, at a reasonable entry point.

TWST: Tell us more about IAC.

Mr. Keung: IAC/InterActiveCorp is not just a play in online travel. They also own great online assets in local services, ticketing, personals, and financial services. They are planning to spin off the travel assets over the coming months, enabling them to create value and place greater focus on the individual business units. The market didn't like management's holding company structure. After a year of intensive integration, I think we may finally see the non-travel assets reaccelerate top-line growth while the travel margins should start to expand in 2006.

TWST: When you look at InterActive today, what are the issues with the investors and the stock?

Mr. Keung: InterActive has spent more than a year trying to integrate acquisitions. Meanwhile, maturing US travel growth, asset repositioning, and investing in future growth has negatively impacted near-term results. Management has had significant turnover, a product of acquisitions and portfolio repositioning. Cyclical challenges we talked about earlier also played a role in IAC's travel performance over the last year.

TWST: The other one you mentioned was Cendant. What is it you like at Cendant?

Mr. Keung: At Cendant, you are investing in a management team with a proven track record in buying and integrating assets to generate an attractive return on investment, not unlike a private equity fund. In the past, they've made solid bets in travel and real estate, and the latest bet is in online travel. Over the last decade, what they did in hotel franchising, timeshare, rental car and real estate brokerage has been solid.

Meanwhile, the company generates significant free cash flow and trades at reasonable valuation. Near term, we should see a continued commitment to stock buybacks and dividend increases. Long term, you get an option value in what Cendant can do with its online travel assets.