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Stocks Fools Love: Cendant

Cendant Corporation (NYSE: CD  )
Trading at $22.45 as of 2/9/05

This article is part of our annual Stocks Fools Love Valentine's Day special.

Argh, choosing a stock to love for St. Valentine's Day! As a guy, I immediately thought of Limited Brands (NYSE: LTD  ) , which owns Victoria's Secret, but that was my Valentine value pick in February 2002, in at $11.25 and now trading at $24.

Looking for wiser counsel, I turned to my wife, Paulette. "What about chocolate or flowers?" she asked. So, as a dutiful husband, I checked out (Nasdaq: FLWS  ) . It looked really cheap at a price-to-earnings ratio of 14 until I found out that half of the trailing 12-month earnings came from a one-time gain. So I moved on to look at Godiva's "Objects of Desire" chocolates in a satin heart-shaped box. Surely this must be the one -- it's a great brand, it has fabulous cachet with Paulette -- it must be! What a disappointment, then, when I discovered that Godiva is a division of Campbell Soup (NYSE: CPB  ) . The company's soups and its pitchman, Eagles quarterback Donovan McNabb, may be chunky, but romantic?

Finally, Paulette hit the jackpot: "Well, I like travel and holidays." That's when I realized I was in love. with Paulette, of course, but now also with travel and real estate company Cendant, which is one of my Motley Fool Inside Value recommendations.

How do I love thee? Let me count the ways.

  1. I love turnaround stories. Cendant was formed in 1997 from the merger of CUC International and HFS Services. Unfortunately for Henry Silverman of HFS Services, and the current Cendant CEO, his merger partners were found guilty of "accounting irregularities." Inquiries from the Securities and Exchange Commission followed, and the market wiped $15 billion off the value of the combined company. Today, Cendant is refocusing its core travel and real estate businesses by selling off non-core assets and acquiring other synergistic businesses.

  2. I love market-leading brands. Cendant's brands either lead or are No. 2 in their respective markets. These brands include car-rental companies Avis and Budget, and online travel sites (which it acquired to boost its business in this area) and There are also major hotel chains, including Days Inn, Howard Johnson, Ramada, Super 8, and Travelodge. Resort Condominiums International has 70% of the vacation exchange market, while Fairfield Resorts has 450,000 member families and is the largest vacation ownership group in the world. And in the real estate division, Cendant's brands include Century 21 and Coldwell Banker.

  3. I love a focused management. Silverman and his team have experienced the pain of rapid growth through acquisition, particularly with the CUC merger. The company's current focus on the higher-margin travel and hospitality segments should produce excellent returns. Cendant has sold off its tax-preparation business, spun off mortgage and fleet management division PHH (NYSE: PHH  ) to shareholders, and will roll out initial public offerings for two more divisions later this year.

  4. I love cash-producing companies. At the end of 2004, Cendant had $4.3 billion in debt and $591 million in cash and equivalents. In the past year, it has reduced debt by $804 million, retired all of its convertible debt, and spent a net $756 million in repurchasing shares. For 2005, the company is projecting $2 billion in free cash flow, and I expect the debt reduction to continue.

  5. I love underappreciated and undervalued companies. I think that the market is undervaluing Cendant for two main reasons. First, any reorganization of this magnitude carries a cost, as well as -- given Cendant's previous history -- some uncertainty. Second, the reorganization costs will keep reported earnings down in 2005, and many institutions may consider Cendant "dead money" in the short term. They want the magic "visibility," but the trouble is that by the time everything's visible, the stock will be efficiently priced.

Treat your lover right
Yes, Cendant is a good choice. What better Valentine's gift than an exotic holiday at Fairfield Resorts' Outrigger Reef Fiji, after all? A bit too pricey? Well then, use to book a weekend in a Ramada Renaissance. You can even buy your dream home together through Century 21 or Coldwell Banker, and then arrange your mortgage and insurance all through Cendant.

If Cendant doesn't do it for you, and you still prefer chocolate, flowers, or lingerie, then I'll recommend just one thing -- buy Cendant stock now, and in a few years, you'll be able to afford that holiday in Fiji.

Philip Durell does not own any companies mentioned here. The Motley Fool has a disclosure policy.

Philip's the brain behindMotley Fool Inside Value. Love value investing as much as you love Valentine's Day? Then take a free, no-obligation trial today.

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