CD is a stock I own. Some posters have expressed the importance of free cash flow. That is the reason to own CD. Below is an excerpt from this week's Barrons interview with Robert Marcin.
Q: How about Cendant?
A: Cendant is another controversial stock. It's a leader in two of the biggest industries in the U.S., travel and real estate, through ownership of such brands as Century 21, Ramada and Avis Rent-a-Car. The stock is now around 12. The company is expected to earn around $1.30 a share this year and $1.60 in 2003. So it's trading for just 7.5 times next year's estimate. They have taken some charges this year for the write-down of mortgage servicing rights.
Q: Why do you like Cendant?
A: Cendant generates an enormous amount of free cash flow. That's because a lot of what they own is brands, not hard assets. Their capital spending is relatively small.
Cendant could generate $3.5 billion cash flow in 2003 and capital spending may be only $400 million. That could mean $1.85 a share in free cash flow for 2003.
Q: What are the main knocks against Cendant?
A: There are several issues. The first is the complexity of the business. The second is that Henry Silverman, the CEO, has been a deal junkie during his entire career and the company has had very few periods when you could actually judge the organic growth because there were always businesses being bought or sold. So it has been an acquisition-driven story. Another issue is the fear that we're in a real-estate bubble and that the profits and revenues from that part of the business are cyclically inflated. I'm not so concerned about the real-estate risk because the average house that Cendant sold last year was about $170,000. So it's not so exposed to the high-end coastal markets.
Q: Where could the stock be a year from now?
A: The Cendant story is that Silverman has pledged to stop making major acquisitions and to use the company's prodigious free cash flow to repurchase shares and to pay down debt fairly aggressively. If that happens, my guess is that Cendant could trade back up to a P/E of 15 to 20, which would put the stock in the mid 20s to around 30. So, again, Cendant is a controversial idea that could double if everything works out. |
