Hilton Hotels Corp. (HLT) Thursday said third-quarter profit rose 46 percent as strong travel demand, led by New York and Hawaii, its two biggest markets, continued to fuel higher room rates.

But the company, in talks to buy hotels outside of the United States from Britain's Hilton Group Plc. , said 2006 profit would fall below Wall Street estimates, sending shares down 3.2 percent.

Third quarter net income increased to $89 million, or 22 cents a share, from $61 million, or 15 cents a share, a year earlier. The results topped the average analyst estimate of 20 cents, as compiled by Reuters Estimates.

Revenue per available room (revpar), a key measure of health in the lodging industry, rose 13.3 percent on a comparable basis at owned hotels in the quarter, and is expected to increase about 11 percent for the full year.

Overall revenue rose 7 percent to $1.1 billion.

"The quarter was pretty good. The 13.3 percent is impressive," said Robert LaFleur, an analyst at Susquehanna Financial Group.

The company said it did not buy back any shares during the quarter, citing the talks with Hilton Group.

LaFleur noted that investors have shied away from Hilton since news earlier this month of the talks with Hilton Group. The deal would give Beverly Hills, Calif.-based Hilton some 400 properties outside of the United States and reunite the Hilton brand after more than 40 years.

"Investors bought into Hilton's strategy of selling assets, buying back stock and moving to a more fee-based business ... This would be a dramatic shift in strategy," LaFleur said.

But Bear Stearns analyst Joe Greff said the deal, depending on its price, makes sense for Hilton. "It can expand its brands in China, Europe, India, and South American, and it immediately increases its presence in Europe, where there is more upside/recovery to (revenue per available room) than in the United States," he said in a report.

Hilton narrowed its full-year 2005 earnings forecast to about $1.05 a share, compared with its previous outlook of $1.05 to $1.07 per share.

The company said the new outlook included the impact of hotel sales completed through October, and excluded sales expected to close in the fourth quarter. It also includes an estimated loss of 2 cents a share from Hurricane Katrina (search).

Hilton owns 70 percent of the 1,600-room Hilton New Orleans Riverside hotel adjacent to the city's convention center, which has been closed through at least next March.

Looking ahead to 2006, the company projected room revenue growth of 8 percent to 10 percent, and earnings per share of 97 cents to $1.03, compared with analyst estimates of $1.04.

Hilton said the 2006 outlook assumes seven additional asset sales expected by the end of the year and the impact of expensing unvested stock options.

"Investors may take issue with below consensus 2006 EPS outlook despite strong (revenue per available room) forecast," Deutsche Bank analyst Marc Falcone said in a report.

Hilton's stock has risen almost 25 percent since August 2004, when U.S. hotel chains began raising room rates after a three-year slump following the Sept. 11 attacks.

But the stock is down more than 10 percent year to date -- compared with a drop of about 8 percent in the S&P Hotels Index amid concern that rising energy costs and interest rates will cut into future travel demand.

Hilton also projected 2005 revenue in the range of $4.4 billion, compared with its previous forecast of $4.44 billion to $4.46 billion.

The company operates hotels under the Hampton Inn (search) and Embassy Suites (search) brands as well as its flagship name. At Sept. 30, the Hilton system included 2,357 properties.

The stock was down 65 cents to $19.16 on the New York Stock Exchange.