BUSINESSWEEK ONLINE : FEBRUARY 28, 2000 ISSUE
COVER STORY Is It Safe Yet to Buy Cendant? The company may be stabilizing, but the stock is still depressed. So, proceed carefully Ever watch a Wall Street darling implode on shockingly bad news and wonder if that would be a good time to buy its stock? The performance of Cendant (CD) since its market cap got sliced in half by revelations of an accounting scandal in April, 1998, serves as a warning against just such an investment strategy. Nearly two years later, CEO Henry Silverman has managed to stabilize the troubled company. But Cendant is still trading below where it was after problems associated with the merger of Silverman's franchising conglomerate HFS with direct marketer CUC International first hit the proverbial fan. To be sure, the stock has had its ups and downs in the meantime. Some investors have actually made money on Cendant by trading the highly liquid stock. Recently, shares nearly doubled from a 52-week low of 13 5/8 in October to a high of 26 15/16 on Dec. 30. Most of the rise was sparked by an announcement that Liberty Media was investing $400 million in Cendant and forming a strategic alliance to develop Internet strategies for the company's travel, mortgage, real estate, and membership businesses. Standard & Poors equity analyst Thomas Graves cheered the move as a "vote of confidence" in Cendant. But investor enthusiasm has tailed off this year (the stock is down about 30% so far in 2000), mostly because of a rising interest rate environment, which spells trouble for the company's mortgage and real estate businesses. Investors have also been disappointed that the Liberty Media alliance has yet to yield a more concrete Internet strategy. DUMPING SHARES? Silverman has said he plans to exercise a bundle of options that expire in 2001 over the next few quarters, and that has spooked investors, who worry that senior management will flood the market with additional shares. Analysts believe this concern is overblown and point out that Silverman has recently increased his personal direct stock ownership from 300,000 to 1.5 million shares. But Silverman still intends to exercise 7 million more shares before the 2001 deadline, and he hasn't said whether he'll hold them or sell them once he exercises. Cendant closed Feb. 17 at 18 1/2, rising 1 1/4 points that day. Although buying Cendant on the initial bad news would have been a losing proposition, several Wall Street analysts argue that now it's safer to get in. First of all, much of Cendant's bad news is behind it. In December, it reached a preliminary settlement with shareholders for nearly $3 billion and took a charge against fourth-quarter 1999 earnings to cover those costs, prompting Graves to upgrade the stock to "accumulate." After controlling expenses, selling some low-margin operations, and buying back shares, Cendant could increase its operating earnings going forward by about 15% or 16% a year, according to Goldman Sachs. Analyst Steven Kent calls it "a solid grower," with plenty of Internet opportunities to provide a catalyst for the stock. "People don't want to buy until they actually see that they are going to uncover the embedded Internet value," he says. Perhaps most important to his rating, at a current price-earnings ratio of only 16.7 times 2000 earnings per share (the S&P 500's forward p-e is 25), it's an inexpensive stock, he says. CUT AND RUN. Cendant is still a cash machine. In 2000, Graves expects it to throw off more than $1 billion in aftertax cash flow. "A company that generates that much cash has some flexibility to pay down debt, buy back stock, and do some additional acquisitions," he says. But it may take several more quarters of strong earnings before most investors feel Cendant deserves a reputation as a solid performer. And as plenty of investors have learned this year, a promise of an Internet strategy isn't a lot to hang your hat on. Investors have shown a pattern of trading Cendant up to the mid-twenties on good news, then getting concerned and selling out, concedes Kent, whose price target is $25 to $27. A 40% gain from the current share price would be nothing to sneer at. But it's still a far cry from Cendant's April, 1998, peak of 41 3/8. Even if the stock reaches Kent's target in the next 12 months, Silverman has a lot more to do before investors can be sure it will stay there. By Amey Stone, with Amy Barrett in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					Henry Silverman's Long Road Back COVER IMAGE: The Long Road Back TABLE: Silverman's Three-Step Plan TABLE: The Cendant Saga CHART: Cendant's Wild Ride TABLE: Cendant's Brand Portfolio RESUME: Henry R. Silverman ``Just Going About His Business'' ONLINE ORIGINAL: Silverman: "The Scars Will Be with Me ONLINE ORIGINAL: Is It Safe Yet to Buy Cendant? INTERACT E-Mail to Business Week Online

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