Cendant: Ascendant Once Again?


By Amy Tsao In early September, Cendant Corp. (CD) appeared to be sitting pretty. It had finally shaken a two-year-old accounting scandal. And the company had raised its earnings guidance for a sixth time in 2001, no small feat considering the dismal corporate-profits environment. The biggest potential snag for the diversified financial-services company was its buyout of ticket-reservation system Galileo International, which was catching flak from regulators. But investors rallied around the deal, also cheering its acquisition of online travel site Cheap Tickets (CTIX), too.

What a difference a day makes. In the wake of the terrorist attacks of Sept. 11, the future looked murky for Cendant, owner of several travel businesses including the Ramada Inn chain and Avis rental cars. After the day terrorists hijacked four commercial airplanes and flew three of them into the World Trade Center and the Pentagon, the travel industry descended into near chaos even as Cendant strove to become a major player in the industry. Now, even though the company had expected to get 50% of its revenues from travel in 2002, it seems that diversification will pay off for Cendant. That's good news for Cendant shareholders.

"OVERSOLD." Since Sept. 17, when trading reopened, its stock has been down as much as 40%. It rebounded to around $13 after Cendant came out with modest earnings adjustments on Sept. 28. "Looking at the travel sector, Cendant has been a little bit oversold," says Aaron Westrate, an analyst at Morningstar. "Because I'm assuming [the travel slowdown] is not a permanent change, Cendant is going to be pretty cheap at these levels."

At a price-to-earnings ratio of 12, Cendant stock has its attractions, and Westrate is looking for signs that the travel industry will be operating at breakeven or better within the next three to six months. While the equity market remains volatile, if the company can make good on its revised earnings guidance, Cendant's price should move higher from here.

No doubt, its hotel, rental car, and ticket-reservation businesses will be hurt by a travel slowdown. However, in several ways, Cendant's exposure to travel is unlike pure-play hotel or airline companies. It has nontravel businesses that could benefit from an economic decline, and a boom in home-mortgage refinancings and increased franchising opportunities could offset much of the losses in travel revenues.

REFI BOOM. "When everything is factored in, [a travel slowdown] is a negative for the company," says Morgan Stanley Dean Witter analyst Mike Happel, who adds: "But it's not as bad as it could've been if the company was less diversified."

The housing market is expected to weaken with the slowing economy, but business at Cendant's mortgage unit should jump as low interest rates fuel a refinancing boom. "Extremely low interest rates can't do anything but help [these businesses]," Westrate says. Meanwhile, a slowdown in housing could create more buyout opportunities for the company, which is known for its appetite for acquisitions.

"They tend to sign up new franchisees" during times of economic slowdown, says J.P. Morgan Chase's Tepper. Indeed, analysts predict CEO Henry Silverman will be on the prowl for buyout targets. "I would expect Silverman to be doing a lot of deals. That's his nature," Horn adds.

A LESSER HIT? In the Sept. 28 conference call, Silverman noted he aims to be "careful to preserve liquidity, but we want to be opportunistic, too." The company has a strong balance sheet, with $2.8 billion in cash and cash equivalents at the end of the third quarter.

Indeed, though Jim Wilson, an analyst at Jolson Merchant Partners, lowered his rating on the stock to a long-term buy after the Sept. 11 attack, he decided after the Sept. 28 conference call that the hit to earnings might be no more than 15% to 20%. A considerable increase in mortgage refinancings should help Cendant's mortgage business, while timeshare, insurance, and membership services should continue to hold up well, he says.

Lower hotel bookings mean lower franchise revenues for the company. However, its hotel franchises, which include Super 8, Travelodge, and Days Inn, among others, will not be hurt as badly as its hotel-only counterparts, since it doesn't own the hotel assets and doesn't have to shell out the fixed costs needed to run them. "It was clearly thrown in the same bath with airlines and hotels. Those two groups have very substantial fixed costs. Even if they're empty, they still have to pay the mortgage, whereas that's not the case with Cendant," says Bernie Horn, president of Boston-based Polaris Capital Management.

BRIGHTER OUTLOOK. Before Sept. 11, some analysts saw Cendant's lack of higher-end hotels as a weakness. True, for business travelers downgrading from Marriott, Super 8 isn't their first choice. However, tighter travel budgets and more car travel should attract consumers to the company's hotels, which are less dependent on revenue from groups and meetings and less reliant on airline travel. "They're poised with a couple of brands that could fare better in soft economic times," says Henry Harteveldt, travel-industry analyst at Boston-based Forrester Research, of Cendant's low-end units.

At a glance, the travel decline might be expected to hit its Avis car-rental business, which caters mainly to business travelers. But a closer look reveals a brighter outlook there, too. Amanda Tepper, analyst at JP Morgan Chase, estimates that Avis makes up just one-quarter of the earnings before interest, taxes, depreciation, and amortization for its vehicle-services division.

The bulk of the division's earnings come from other, more stable businesses -- things like fleet services and a parking-lot business in Britain, Tepper says. In response to the expected slowdown, Avis has idled many of its rental cars and has layoffs and other cost cuts planned before yearend. Tepper thinks the stock could hit $22 a share within the next 12 months.

MODESTLY LOWER. Cendant says it expects earnings per share of between $0.15 and $0.19 for the fourth quarter, vs. the previous forecast of $0.24 per share. The company will take a $50 million charge as a result of the terrorist attacks. And the Galileo and Cheap Tickets acquisitions, which will both close sometime in the first two weeks of October, will add less to earnings than previously expected.

Still, the company's lowered earnings expectations are modest compared to those issued by airlines and hotels. Now, Cendant says it can produce earnings per share of $1.15 to $1.25 in 2002. Before Sept. 11, analysts had pegged the 2002 EPS number at $1.38. Now, they're looking for $1.19.

The travel slowdown could become a travel standstill if terrorists strike again. In that case, there's little Cendant or anyone else in the travel industry could do, and the stock price would suffer. But its variety of businesses makes Cendant one travel-related company that can survive, even thrive, in an ugly travel downturn. Tsao covers the markets for BW Online from New York


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