Highflying Cendant lands hard: an auditors' report due this summer could clip share price even more

Kiplinger's Personal Finance Magazine, July, 1998 by Ken Sheets

An auditor's report due this summer could clip share price even more.

One reason so many Americans still tough it out in bank CDs: A company, led by a brilliant executive, adopts a seemingly infallible business strategy and amasses a striking record of sales and earnings growth. Smitten, Wall Street can't buy its shares fast enough, sending the stock price soaring. Then, wham--disaster hits and the stock takes an Icarus-like plunge to earth.

This occurs with distressing frequency in today's hypersensitive stock market. And it happened most recently to Cendant, which is short for "ascendant" but could as easily stand for "descendant": In mid April its stock plunged from $36 to $19 per share, a 46% decline that erased in one day nearly $15 billion from the company's market value.

The big sell-off came after Cendant announced that "accounting irregularities" at one of its many businesses would force the company to lower previously announced earnings of $1 per share for 1997 to around 87 cents per share. Cendant has also postponed its annual meeting from May 19 until an audit reveals the extent of the problems.

If Cendant's rise and fall seems unusually swift, that's because it did not exist by that name this time last year. It was created in December by the $14-billion merger of HFS, a franchiser of hotel chains, rental-car companies and real estate brokers, and CUC International, a direct-marketing company that sells, among other things, memberships in clubs that offer consumers discounts on a wide range of goods and services. The accounting problems were centered in CUC's membership-services unit. Some of Cendant's best-known brands include Days Inn, Howard Johnson, Ramada, Avis, Century 21 and Coldwell Banker.

Cendant's chief executive, Henry Silverman, 57, moved quickly to repair the damage. He replaced key executives from the unit involved and hired accounting firm Arthur Andersen to conduct the audit. He squelched speculation that the previously announced $3.1-billion buyout of American Bankers Insurance might be jeopardized by the fall in the company's stock price. He then revealed that Cendant would acquire the motoring-services business from Britain's Royal Automobile Club for $750 million. Another recent buy: National Parking Corp., a British parking-garage operator ($1.3 billion).

THE CASE FOR INVESTING

At best, Cendant presents investors with a rare opportunity in today's overvalued stock market: a chance to buy a fast-growing, cash-generating company at what seems a bargain price. Anthony Gallea, a broker and portfolio manager at Salomon Smith Barney and author of Contrarian Investing (New York Institute of Finance, $25), describes Cendant as a classic contrarian play--a big, well-positioned company victimized by overreaction to bad news. "Any large company that gets whacked in half like that is worth looking at," he says.

The opportunity to buy low may not last long. The stock price has recovered to a recent $24, indicating that investors believe Cendant's problems are isolated in the old CUC. Analyst Christopher Feiss of BT Alex. Brown estimates that Cendant will continue to increase its cash flow (earnings before interest, taxes and depreciation) by 20% to 25% annually

RISKS TO CONSIDER

At worst, the Arthur Andersen crew will uncover more problems and the stock will set new lows as Cendant settles into a profits rut. Surely anyone buying the stock before the auditors finish this summer is flying blind. Cendant also faces a slew of class-action lawsuits filed by shareholders who claim they lost money because of misleading financial statements.

RELATED ARTICLE: Cendant

Symbol: CD (NYSE) Recent share price: $24 Earnings per share:

1995       1996       1997               1998       1999
$0.56(*)   $0.70(*)   $0.817([dagger])   $1.17(#)   $1.46(#)

(*) combines HFS and CUC

([dagger]) estimate of restated earnings

(#) estimates

Number of analysts who recommend: * Buy: 8 * Hold/Sell: 5

Shareholder information: 203-326-5013 Web site: www.cendant.com