<< VALUESPEC's Partial Analysis of CD on 7-25-98:
How does CD compare to other S&P Stocks?
First, let's get an idea what type of PE the average S&P 500 stock sells for. CD is an S&P 500 stock and ranks around number 295 based on revenues, according to Fortune magazine's "Inside the Fortune 500".
Even with the Forbes CUC fiasco, I estimate that they will still rank around 305.
According to briefing.com, the average PE for an S&P company is 24.60 based on Fiscal year 1998 estimates.
And the average % growth rate for 1998 over 1997 is expected to be at about 3.5%, assuming the average S&P company has a strong second half in 1998, which is by far not certain.
I quote Briefing.com as the source for these figures as follows:
Document dated July 24, 1998-
<<In fact, the market has been steadily lowering its sights for Q3 over the past few weeks. Even if we assume that year/year growth over the next two quarters accelerates to 5% (a big jump from the anemic pace of quarters one and two), we're still looking at FY98 earnings of $46.26, or 2% below current estimates and only 3.5% above FY97 results.
Based on this assumption, the S&P 500 trades at 24.6x FY98 estimates, or just slightly below record valuations. We know that rates are low and inflation under wraps, but does 3.5% earnings growth really justify near record p/e levels? >>
Link to the former article from Briefing.com:
briefing.com
Now, we know the average S&P stock has an estimated PE of 24.6 and a growth rate compared to 1997 of 3.5%. How does CD compare, and how much would CD sell for it it sold at a similar multiple?
Let's see, according to Mr. Silverman's latest projection, the company will still earn about $ 1 billion dollars in 1998 according to Mr. Silverman's comments at the time the most recent accounting fraud was announced on July 14, 1998 (9th paragraph):
<<Cendant continues to be a premier franchise in the services industry whose earnings should approach one billion dollars in 1998.>>
Link to that statement:
valuespec.com.
Therefore, based on approximately 900,000,000 shares outstanding, CD according to statements just made by Mr. Silverman (CEO of CD), as I just documented, should earn about $ 1.11 per share in 1998 ($ 1 bil / .9 bil shares).
You can confirm that the fully diluted shares (how many shares after options convert, etc.) is about 900 mil by going to the 10Q dated May 1998. Following is the direct link to the SEC document:
edgar-online.com
So now we've determined that the company is saying that for 1998 they should make around $ 1.11 per share.
Now, you might ask, Mr. Silverman said they would earn $ 1 bil, but was that before or after tax? I believe it was after tax since last quarter they earned close to $ 250 million and this year's earnings should only be lowered by another .06 per share for the year based on the July 14, 1998 press release. You can go to the 10Q I just provided the link for to confirm that they did NET about $ 250 mil last quarter.
So, I think I've established clearly that CD is likely to earn about $ 1.11 in 1998. So, what is CD's FY 98 PE? And Let's compare it to the average S&P PE.
Price: $ 15.00
1998 est earnings: $ 1.11
PE for Fiscal year 1998 (and calender year): 13.51
Does that make you feel better?
OK, it gets better. CD should grow earnings 20% per year in the near future as per Mr. Silverman's recent comments. What has the average S&P stock done for 1998 compared to 1997?
As I noted near the beginning of this report, the Briefing.com calculates that the average S&P stock will only grow earnings about 3.4%.
Wow ! Only 3.4% average growth and yet a PE of 24.6 ! And CD has a current PE for FY 98 of only 13.5? AND CD is expected to continue earnings growth at about 20%?
AND CD has one of the best growth records in the S&P 500?
AND one of the best earnings growth record?
AND is selling for less than when the CUC merger was announced?
(go to a chart and look back to late 1997).
SO WHAT IS HOLDING THIS STOCK FROM GOING HIGHER?
My belief is that fund managers are stunned. They are emotionally drained. They are upset. And they are fearful of more cockroaches being found, and in looking bad if they take a large stake in CD and the audit is found to be much worse than expected.
HOWEVER, I say CD is so low now, that even a much worse than expected audit report will still make CD about fairly valued. Objectively, there is no good reason not be buy CD now.
SO, the likely worst case scenario, IMO, is that CD is fairly valued now. The likely scenario, in my mind, is that the audit comes up with a little more bad news, but no more than another six cents. But now all the bad news is out, and CD goes up to $ 20.00 fairly quickly.
Let me make this note. I don't have documentation for this right now, but I recently read/heard that over 85% of the mutual funds did not perform as well as the S&P index in 1997! That means putting an equal dollar amount in each S&P stock and doing nothing would have paid off better than paying someone to pick stocks and beat the market index !
It is these same managers, IMO, that are selling CD now. It is pathetic and they will probably, again, not perform as well as the S&P index because of doing things like selling CD at $ 15-$19, or at least not buying at times like now.
So, right now, if CD were selling at the average PE of 24.6, CD would sell for $ 27.30 (24.6 X $ 1.11).
I think we may see much closer to that number before the end of the year than we do now, especially if the audit is clean, the ABI merger is completed on reasonable terms, and the because CD's earnings rate is historically, and is expected to continue to be much higher than the average S&P stock. I expect at least $ 20+, but who knows?
I hope these numbers give you something to think about regarding CD. I see CD now as an extraordinary opportunity. And it is one that I have put most of my eggs into, again, at $ 15.42.
Please note that I am not a financial advisor and these figures/facts may contains errors. One should always consult his/her financial advisor before making investment decisions.
CD: ~ $15.00a
Sincerely,
VALUESPEC
valuespec.com >>
Link to the former Analysis found in valuespec.com:
valuespec.com |
