From Value Line
Cendant continues to pursue objectives aimed at regaining investor confidence. The accounting questions which surfaced earlier this year forced Cendant to restate earnings for the past three years (our numbers reflect the restatements for 1996 and 1997), and aroused doubts as to the viability of the company's earnings potential in the coming years. However, the recent proposed sales of two major subsidiaries, Cendant Software and Hebgo Mag International, for a combined $1.5 billion in cash and stock has eased concerns regarding Cendant's financial stability. Also, the withdrawal of its lengthy takeover bid for American Bankers was a positive, given that the acquisition may have been too costly and would not have been accretive to Cendant's earnings.
This program of divestitures is likely to continue at Cendant. The company, which in the past fueled growth through acquisitions, is now curtailing its purchases and concentrating on its core travel and real estate businesses. Proceeds from the sale of non-strategic activities will likely be used to pay back debt and repurchase stock. Cendant has already announced a $1 billion stock repurchase program. Additionally, Cendant's excellent free cash-flow, which had formerly been used for acquisitions, will likely now be utilized to speed up the debt and stock retirements.
Strong internal growth from core businesses, combined with debt reduction and share repurchases, should support our projections of around 18% annual earnings gains for Cendant out to 2001-2003. Consumer demand for the services offered by Cendant's well-recognized brand-name franchises (e.g. Days Inn, Century 21) should remain strong assuming a stable U.S. economy. Also, the strength of Cendant's marketing efforts should lead to its capturing a greater market share in its travel and real estate franchises from competitors. These neutrally-ranked shares have above-average appreciation potential over the next 3- to 5-years. Risk-averse investors, though, may want to hold off from buying the stock, until the company completes its divestiture program.
Yehuda Fruchter December 4, 1998
Alain Dubreuil |
