Meeting With Cendant
On Tuesday, March 21, Cendant held an analyst meeting with portfolio managers in New York. Cendant is a ridiculously cheap stock but its chairman is being punished by the investment community for his excessive compensation of over $100 million plus per year–if you can call making over $100 million-plus per year punishment.
In addition to Henry Silverman’s excessive compensation, there are also concerns about so-called revenue synergies between the number of different businesses that Cendant owns. Many of the businesses are in similar industries and are dependent on one another in one form or another. However, even with these two concerns, Cendant is a cash flow machine.
To address these concerns, Cendant is breaking up its vast array of businesses into four groups. The breakup will occur serially during 2006. The four businesses are real estate, travel distribution, hospitality and vehicle distribution (rental cars–owns Avis and Budget).
The real estate business is a great business but has peaked in 2005 and will be on the decline for the next year or so. The travel distribution business consists of internet-related startups that are having some difficulty finding a profitable position in the marketplace and will most likely be part of a consolidation process after these businesses are independent. The hospitality is an excellent business but is most likely approaching a cyclical peak in the next twelve to eighteen months. And the final business group is the vehicle distribution business which appears to be bottoming and could be in good shape by 2007.
Cendant sells for about 7.2 x its operating cash flow, for those not in the finance business, that is pretty cheap for a company that owns such well-recognized names such as Coldwell Banker, Sotheby’s, Wyndham, Ramada, Howard Johnson, Avis and Budget to name a few. It is also a cheap valuation relative to its low debt level, its growth prospects and its free cash flow generation.
Investors should not be hurt by chipping away at this stock at current levels. This stock has been dead money for a while and downside risk is most likely limited. There is the risk that a real estate slowdown could considerably hurt the operating performance of the company for a while, but the balance sheet is in great shape and from conversations with management, they have limited exposure in some speculative markets such as Las Vegas and Florida.
My approach will be to slowly chip away over time. We have plenty of investment prospects for 2006 and Cendant could turn into a much better investment idea in 2007.
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