Below I've copied part of a letter which I wrote to someone today:
If you still have some CD, I suggest that you do two things to learn more about CD. First, read this:
valuespec.com
Second, listen to the replay of the 2Q conference call at 1-888-566-0852. This may not be replaying for very much longer, but it is still playing as of this writing. Or you can wait and read the transcript which I plan to make in the near future.
With that said, I'll answer your concerns as follows-
<<1. The business sectors it is in would be heavily effected by an economic downturn. The hotel business is not good right now (too much competition).>>
This was asked on the most recent conference call. Yes, the hotel business is currently believed to be topping. Yes, many hotel companies will probably see earnings per average room (RevPAR) decrease within the next year or so. However, CD is not a hotel owner. They are a franchiser. According to the CEO, historically, they actually see business increase during downturns in the market because more independent companies opt to become a franchisee to fill rooms. The net result, though receiving less revenue per hotel via commissions, is that they have more franchises and, therefore, end up getting more money overall.
<< 2. devalued stock makes mergers/buyouts more expensive.>>
This is a financial myth not based on reality, though this myth is often stated in the financial news. CD's growth has not been fueled by stock buyouts. To the contrary, they have been buying numerous companies with all cash. CD has cash coming in each year of about $ 1 bil. With this cash-flow and extraordinary organic growth, they have achieved spectacular returns for their investors (going back to HFS). Yes, the ABI deal contained partial stock payment, but that is, I believe, in part because they needed a certain amount of cash to meet Florida Insurance requirements, since ABI is an insurance company.
Since the ABI deal will now cause earnings to decrease, because of the low price, CD is selling some divisions to raise about $ 2 bil in cash. They of that $ 2 bil, they already have $ 500 mil raised. For tax reasons, it is not favorable for the ABI shareholder to receive all cash. I think they can get as much as 60% of the payment in cash before it hurts things for them. Therefore, I expect the cash portion of the ABI deal to be increased to the maximum allowed, but the rest will be paid in stock.
However, CD will almost definitely announce a stock buyback to buy back all or a significant portion of the shares given to ABI in the cash and stock deal. At the time of this buyback announcement, CD's price could rise nicely. In fact, if it rose enough, CD might not even have to issue as much stock to ABI as some now are speculating. If CD hardly rises on the buyback news, CD will simply buy an appropriate amount of stock on the open market to make sure the deal is not so dilutive to earnings. At a stock price of $ 25.00, the ABI merger will not be dilutive.
CD can not buy back stock until the final audit is completed. It is expected to be completed by the end of this month. I am hearing that August 24th will be the day.
<<3. Subsidiary cooking books still hanging over company. There is still a chance that the subsidiary is not profitable and could lose money dragging down earnings.>>
Yes, to those still emotionally charged, or uninformed, the "cooked books" are still a concern. However, the audit has been completed and it has already been stated that the CUC's books are now good. In fact, three accounting groups have looked over them. Few companies will have the clean books that CD now has, IMO.
The old CUC business, the business with all the problems, is not nearly as profitable as once believed. The CEO explained that they pushed memberships, there main business, over profitability. They did this because they were then fudging how much money was being made on each member, thereby propping up the price. Now, the fees will be in line with the costs. This will result in less business, but more profits. Now, the mantra will be profitable membership growth instead of membership growth at any cost.
Some of these units will be sold, but because of accounting rules put in place when they bought the bad company, CUC, they are not able to sell all of it. I believe this is because they accounted for the merger as a pooling of interest.
The CEO, Mr. Silverman, stated that the CUC business now has the potential to make significant contributions to the company going forward. We'll have to wait to see what happens. In any case, assuming very little growth, I don't see CD's performance being hurt too badly as the other units are doing fantastic (Earning were up 44% last quarter).
<< 4. most important a lack of trust by investors.>>
This is probably the most important factor. I think they will come back when/if CD keeps doing what it used to do before it merged with CUC and was called HFS. The fundamentals for CD are still there. Now is the time to buy and wait for sentiment to change. I believe CD will way outperform the average S&P stock, and do it with less risk as the books have already been gone over, and the stock is already low priced so it doesn't appear to have far to fall, even if the market starts to correct further.
You did not mention the litigation resulting from the CUC crimes. This could be a decent amount. The company, I believe, does have insurance for these matters, but to what extent, I don't know. Settlements are most likely three to five years away, according to the CEO. I plan to call the company to try to get a better feel for how things might settle. Usually, the lawyer get lots of money, the investors get some, and the company is usually not hurt real bad. With CD, however, in light of all the known and admitted fraud, I don't know what might happen. I suspect it will be worse than average, but not catastrophic. Three to five years is a long way away, too.
<< Even with all this the price should be in the low twenties. It probably will be when the accounting issue is settled. After a few more good quarters and a good recommendation it could end up in the upper twenties. I don't see it going any higher than this because confidence in the stock as an aggressive growth company is severely shaken. It may spike on a momentum play but it will take a lot good earnings before big mutual funds accumulate large positions. Of course this is my humble opinion and based on speculation. I realize my opinion is worth no more than anyone else's.>>
If the market stays strong, it could see the $ 20's even by the end of this month when the audit comes out, however, I'm willing to wait this one out as the business fundamentals are really strong and Mr. Silverman, up until the CUC fiasco, perpetrated by Mr. Forbes, has a great track record for adding shareholder value.
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CD: $16 7/8
VALUESPEC
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