TALES OF THE TAPE: Cendant Back On
Acquisition Trail
By CHRISTOPHER C. WILLIAMS
Of DOW JONES NEWSWIRES
NEW YORK -- With its aggressive foray into the beleaguered online travel
business, acquisitive Cendant Corp. (CD) could be buying its way into trouble
again.
Although it's still recovering from its ill-fated 1997 merger with CUC
International, Cendant, a provider of travel and residential real estate services,
has returned to the acquisition trail in a big way. But pending acquisitions of
Galileo International Inc. (GLC) and Cheap Tickets Inc. (CTIX) began to
look ill-timed as the travel business started to struggle even before the Sept.
11 terrorist attacks. Amid the uncertainty, you might think investors would
have scorned Cendant's acquisition strategy.
Wrong. The Street cheered.
Before the market selloff that followed the Sept. 11 tragedy, Cendant was on
a tear, zooming more than 68% for the year to $17.76 on Sept. 10. Cendant
hit a 52-week high of $21.53 in July - an amazing recovery for a stock that
sold in the low-single digits after the CUC deal imploded.
Bulls, such as Morningstar analyst Aaron Westrate, contend the market's
recent drop and the weakening economy should only fuel Cendant's
acquisition push, increasing the number of possible takeover targets.
"I'm betting...they've learned their lesson and won't have a repeat" of CUC,
said Westrate. "Though no one is very bullish on the travel-related sector,
(Cendant) will pick up acquisitions over the next six months at pretty
reasonable prices."
Cendant's recent stock weakness could slow the pace of acquisitions a bit,
but Robertson Stephens analyst Jay Leupp said "even if it stays down,
Cendant can still safely execute $3 billion to $5 billion worth of additional
acquisitions."
The reason bulls like Westrate find Cendant's approach palatable can be
summed up in four words: strong free cash flow.
"I very rarely have companies in my portfolio dependent on acquisitions, but
to some degree it's not just an acquisition story," said Bernie Horn, whose
Polaris Capital Management has less than $1 million worth of Cendant shares.
"The organic growth of the business is strong and it's supplemented by
acquisitions. (Furthermore) it's a company that's generating a fair amount of
cash flow."
Horn believes Cendant can generate more than $1 billion of annual free cash
flow in the next two to three years from around $750 million expected this
year.
Jerry Peterson of Westcore Select fund, a product of Denver Investment
Advisors, said Cendant will do close to $1.2 billion in free cash flow this year,
excluding acquisitions. "It's very attractive on a cash flow" basis, the portfolio
manager said. Cendant is a major holding of Denver Investments.
Another big attraction for bulls: Chairman Henry Silverman - and his
perceived dealmaking acumen. "I believe in Henry Silverman," gushed
Peterson. He made mistakes a few years ago, but we all make mistakes."
Added Peterson, "Henry is going back to what he does best: acquiring
companies that are additive to earnings."
Horn likes Silverman, too, but for different reasons. Horn notes that
Silverman's stock options are exercisable at $22. The executive, Horn said,
will do all he can to get the stock to that level "without (taking) too many
risks." He added, "Make no mistake, Henry Silverman is not a roll-up your
sleeves executive. He's a lawyer, a deal maker."
Stock Hit Hard By Selloff
In the downturn since the terrorist attacks, New York-based Cendant has
taken it on the chin along with the rest of the travel industry. A drop in air
travel affects all parts of the business, from airlines to hotels to rental cars.
Cendant owns and franchises a global network of travel-service brands,
including rental car company Avis Group Holdings and hotel chains Ramada
Inn and Howard Johnson. Non-travel businesses include real estate brands
Century 21 and Caldwell Banker and a mortgage-financing unit.
At $11.54, Cendant is off 35% since Sept. 10, getting close to its 52-week
low of $8.13. But the stock is still ahead about 22% for the year, smashing
the S&P 500, which is off 24% year to date.
Cendant said it's still assessing the potential damage to its business from
Tuesday's disaster. But analysts are nervous. Robertson Stephens' Leupp
noted that three sectors of Cendant's business will be hurt by the travel
downturn - hospitality, vehicle services and Galileo, which represent about
49% of his 2002 EBITDA estimate. Last week Leupp cut his adjusted
earnings estimates by 3 cents to $1.06 a share for 2001 and 10 cents to
$1.32 for 2002.
On the positive side: Cendant's other operations, real estate and financial
services, remain intact, strong and stand to benefit from interest rate cuts.
Horn, of Polaris, said Cendant has less of a fixed asset base than other
travel-related companies such as airlines and some hotels, getting much of its
revenue from providing services. Also, Cendant's mortgage business "is as
important, if not more important, in terms of cash flow" than the travel-related
business, Horn said.
Despite last week's earnings cut, Leupp noted that Cendant should grow
earnings 24.5% in 2002, 1.7 times the rate for the S&P 500. The analyst
repeated his strong buy rating on the stock, seeing it selling at a sharp discount
to the S&P 500. He sees the stock reaching $28 in a year.
The weakness in Cendant has made it more appealing to some bulls. Using
cash flow divided by market capitalization, Horn suggested Cendant was
close to fair value around $17. Now he said it's "one of the cheapest stocks"
among those he follows.
Value money manager Greg Summerville thinks so, too. "I've been nibbling,"
said Summerville, of Kirr Murback & Co., in Columbia, Ind. "You could
justify (the stock in) the high teens, low-20s without much of a stretch."
Peterson of Westcore, who sold Cendant and all travel-related stocks in his
Westcore fund after the attacks, plans to make Cendant one of his largest
holdings again. "The stock is unbelievably cheap right now," he said.
Tainted History
As head of Hospitality Franchise Systems, Silverman, looking to leverage the
power of his brands such as Days Inn, merged with CUC, a direct marketing
giant, in 1997 in a $14 billion deal. The new company was called Cendant
with Silverman as CEO. But in 1998 it was revealed that CUC inflated results
before the merger, sending Cendant tumbling. It once traded as high as $41
after the merger.
To right the ship, Silverman focused on internal growth and strengthening the
balance sheet during much of 1999 and 2000. But over the past year he's
been on a buying spree. Along with Galileo and Cheap Tickers, Cendant has
bought Avis, brand and franchising rights from the AmeriHost Hotel and
Fairfield Resort.
The wheeling and dealing makes sense to bulls. They like that Silverman is
creating a fee-for-service business off the old HFS model, focusing on real
estate, mortgage and travel. Galileo and Cheap Tickets are strategically
important, bolstering Cendant's budding travel portal.
Until now, Cendant's diversified portfolio and acquisitions had sheltered the
company from the economic downturn. Cendant has been on an earnings roll
that would make General Electric Co. (GE) jealous. Management raised
earnings estimates six times this year, an impressive feat that attracted many
investors to the stock.
Short sellers have also taken residence in Cendant, with short interest at 102
million shares as of Sept. 13. An arbitrage trader explained that much of that
is due to traders selling Cendant shares short and buying shares of the
companies it's acquiring.
There are legitimate risks. Even with an experienced deal maker at the helm,
growth by acquisitions is a risky approach, as the CUC deal has shown.
With the market downturn, speculation is rampant that Cendant may scrap the
Galileo and Cheap Tickets deals, although Cendant spokesman Elliot Bloom
said the company is committed to completing these transaction. But most say
that's unlikely. In fact, Cendant has extended its tender of Cheap Tickets, and
Galileo got antitrust approval from Europe Monday. What's more probable is
that Cendant will change the terms of the acquisitions, say company
observers. Another question mark: Cendant is jumping into an online travel
business already populated with larger rivals in Priceline.com Inc. (PCLN)
and Travelocity.com Inc. (TVLY). Plus it's uncertain when the business will
turn.
Finally, the near-term outlook for earning will remain unclear until Cendant
provides details. Will analysts maintain their buys on the stock when
management finally comments?
But bulls maintain high hopes for Cendant. Some note that the stock is already
discounting the acquisition risks. And, conceded Westrate of Morningstar,
"it's not ideally positioned in a recession, but due to Silverman's deal-making
acumen, the company is well positioned for an upturn."
-By Christopher C. Williams, Dow Jones Newswires; 201-938-5219;
christopher.williams@dowjones.com |
