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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: SC who wrote (646)	8/16/1998 8:58:00 PM
From: porcupine --''''>	Respond to of 1722

Sean: At a gut level, I don't feel comfortable enough with Cendant to do detailed research to confirm or disconfirm my concerns. There are so many "devil-I-know" companies (like GM and Boeing) that I feel are much easier to understand, so I tend to focus my attention on them. Here's the beginning of the 10-K Cendant filed just before the $700 million fraud was uncovered: See: sec.yahoo.com "CENDANT CORP (CD) "Annual Report (SEC form 10-K) "March 31, 1998 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "GENERAL OVERVIEW "On December 17, 1997, Cendant Corporation (the "Company") was created through the merger (the "Cendant Merger") of CUC International Inc. ("CUC") and HFS Incorporated ("HFS") with CUC surviving and being renamed Cendant Corporation. The Company is one of the foremost consumer and business services companies in the world. The combination of CUC and HFS provides the Company's membership businesses access to HFS's more than 100 million consumer contacts, while providing HFS businesses with the technology-driven, direct marketing expertise necessary to successfully cross-market within its existing business units. "The Company provides fee-based services to consumers within the Membership Services, Travel Services and Real Estate Services business segments. The Company generally does not own the assets or share the risks associated with the underlying businesses of its customers. In the Membership Services segment, the Company is a technology-driven leading provider of membership-based consumer services. In the Travel Services segment, the Company is the world's largest franchisor of lodging facilities and rental car facilities, the leading provider of vacation timeshare exchange services and a leading provider of international fleet management services. In the Real Estate Services segment, the Company is the world's largest franchisor of residential real estate brokerage offices, the world's largest provider of corporate relocation services and a leading mortgage lender in the United States...." ---------- Right off the bat, this is one company I don't want to try to understand. There are just too many things going on. What happens when there's a recession? The travel, real estate, and corporate relocation services would surely slide. How would this affect overall performance? How would I estimate that? I am only vaguely familiar with the "membership-based consumer services" industry. I don't want to bad mouth something I don't have detailed knowledge of. But, the anecdotal experience I have does not encourage enthusiasm on my part. And, the franchise business is one that invites the obscuring of the franchisor's true financial picture -- even without any actual fraud. From an economic point of view, the franchisor/franchisee relationship is a single entity. Suppose, for example, Barnes and Noble's corporate division "sold" all of its stores to franchisees. Regardless, the fate of the one would rise or fall with the other, since the franchisor corporate division would be the sole supplier to the franchisee stores, and the stores would be the sole customers of the franchisor. But, because headquarters would have more bargaining power than any of the franchisees, headquarters would constantly strive to move liabilities onto the balance sheets of the stores. Yet, whatever the accounting niceties, the actual economic risk of the liabilities is still shared by the franchisor, since the economic fates of both are interwined. See, for example, the article about Coke and its bottling "franchisee", above at: Message 5410513 I hope this is of some help.