Cendant Dives to New Low

It's Valentine's Day! A year ago, Motley Fool Inside Value newsletter chief Philip Durell picked real estate and travel company Cendant (NYSE: CD  ) as his Valentine selection. So, with the benefit of one year's hindsight, was there something here to love?

Let's start by quickly reviewing what made Philip's heart pitter-patter. There was the turnaround story, the market-leading brands, focused management, and lots of free cash flow. That's a great combination, especially when you add in the fact that the stock was unloved on Wall Street -- that is, it was trading well below its computed intrinsic value.

Well, get out the hankie -- this stock remains unloved today, too. Besides hitting a new 52-week low this morning, the stock is trading at prices it hasn't seen in two and a half years. Yikes, that's ugly!

Sending the stock lower was last night's earnings report. Although fourth-quarter revenue increased 7%, the company reported a loss of $0.04 a share (although, if one-time adjustments are removed, income from continuing operations was the $0.23 the company had previously forecast). The really bad news was that the company reduced its earnings expectations for the first quarter. The stock is down 7% in late afternoon trading to $15.72 a share.

Enough about the problems! Let's find what there is to love.

In 2005, the company produced over $2 billion in free cash flow. The company used that sizeable fortune to repurchase $1.3 billion worth of its own shares and to reduce total debt by $400 million, which might prove critical as it relates to the expected split-up (more on that below).

The company is also splitting into four separate companies. Investors would be wise to look at the company's initial public offering of Wright Express (NYSE: WXS  ) and the spin-offs of Jackson Hewitt (NYSE: JTX  ) and PHH (NYSE: PHH  ) . All are trading higher. All were well-established companies in their industries -- very much like the four separate companies shareholders will receive this summer.

The one fly in the ointment that makes the quadruplet of companies a concern is that they were built with the thought they would be synergistic. Shared customer lists would lead to cross-selling, which would lead to a set of companies that were stronger as a group than as separate entities.

While the company thinks Wall Street has underpriced its asset and that it will be more fairly valued as more focused assets, there's still concern about the separate company's credit ratings. Cendant management expects that only the vehicle-rental division will carry a lower credit rating, while the other three will emerge unscathed. That said, the capital structure of the separate entities has not yet been announced, and, well, that's where the rubber hits the pavement and credit ratings are determined in earnest.

That said, analysts expected the combined company to grow earnings 13% a year for the next five years. Since the stock is trading for an adjusted 12.3 times trailing earnings, there's no obvious premium being applied to these shares. Though some questions remain as to the success of the split-up, investors would be wise to consider this stock as a Valentine's Day treat to themselves.

Are you looking for more great companies selling at value prices (less than intrinsic value)? Let The Motley Fool'sInside Valuenewsletter bring you two selections to consider each month. Try a free trial subscription today.

Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.


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