FOOL ON THE HILL
Many investors still cringe at the mentioning of Cendant Corp., whose stock was blasted in 1998 by an accounting scandal. Nearly three years later, the company looks much different than it did back then, although you wouldn't know it from the firm's still-low share price. While Cendant may have recovered from its scandal, its reputation with investors may be lost forever.
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Sometimes, following the stock market can feel like tracking Paris runway fashions or watching the children's toy business, because that's how fast things come and go. A thorough chronicle of the different short-lived Wall Street fads and crazes over the years would probably rival the Encyclopedia Britannica in shelf space. Not that anyone needs to worry about such a collection ever coming to market, because no one would ever buy it. In the stock market, the past gets ignored about as regularly as Robert Downey, Jr. gets arrested. Needless to say, you can't make big money from hindsight. The "here and now" is what counts on Wall Street, and that's why old perceptions are always being replaced by new ones. Every now and then, though, the past lingers with a stock far longer than normal. Johns Manville (NYSE: JM), which will cease being an independent, publicly traded company once its planned acquisition by Berkshire Hathaway (NYSE: BRK.A) is completed, will forever be associated with asbestos. Likewise, a 1990's Medicare fraud scandal will probably always taint Columbia/HCA, even though the hospital operator has since changed its corporate identity to HCA - The Healthcare Co. (NYSE: HCA). The name may have changed, but the company's past surely hasn't. And then there's Cendant Corp. (NYSE: CD). The accounting scandal that rocked this company in 1998 might never be completely forgotten by the market or by investors, especially those who suffered large losses at the company's hands. For this writer, the mere mention of the company's name still conjures up images of fund managers screaming about corporate malfeasance on business TV programs and sad Fool on the Hill headlines of a by-gone era, such as D-Cendant and Cendant the Defendant. I don't know if these personal images will ever be fully erased from my memory, regardless of what the company does to try and escape from its past. And this is exactly what Cendant itself has been trying to do ever since 1998. Numerous business divestitures and additions over the past 18 months have given the company a different feel today than what was presented to investors in the prior to the scandal. As background, Cendant was formed when two huge growth stocks of the early 1990s, HFS Inc. and CUC International, got together in 1997. The idea was to meld HFS's stable of travel and real estate brands with CUC's consumer membership club rolls. The result was supposed to be franchising heaven. But the deal turned into shareowner hell when it was finally revealed that CUC had been cooking the books all along, prompting the combined company to restate years of financial results. Back in its salad days before the CUC merger, HFS boss Henry Silverman liked to talk about his company as a kind of new-age franchising operation, where the main value creation opportunity laid in cross-marketing franchise properties such as Century 21 real estate, Howard Johnson hotel rooms, and Avis rental cars to different customers. All of these franchising transactions would go into the same HFS hopper, of course. The strategy seemed destined to work, so long as customers stuck to the same franchisers and new customers and franchisees were added at a dependable rate. At today's Cendant, Silverman's main concern is not the franchising shuffle but basic blocking and tackling. The company's real estate business, which includes Century 21, Coldwell Banker, and ERA on the brokerage franchising front and Cendant Mortgage Corp. on the loan origination front, should see decent results this year as lower interest rates give a boost to the homebuying and refinancing markets. The company is also expecting good results from its travel operations, which have been expanding. Late last year, Cendant said it would buy timeshare and vacation resort operator Fairfield Communities (NYSE: FFD) and the remaining share of car rental franchisee Avis Group Holdings (NYSE: AVI) it does not already own. Last week, British vacation rental brand Holiday Cottage Group Ltd. was added for undisclosed terms. Meanwhile, the company has been shedding other businesses, including most of the CUC legacy. Cendant's individual membership and loyalty businesses will be spun-off to shareholders as a separate entity sometime this year, and the units are already being treated as discontinued operations for financial reporting purposes. As a consequence, much of the accrual accounting elements that existed in Cendant circa 1998, particularly the cash flow accounts for membership acquisition costs and the amortization of those same costs that caused so much consternation around the time of the scandal, have disappeared. Gauging from the most recent 10-Q, Cendant today offers an easier financial picture on the fundamentalist investor's eyes. In fact, the company looks a lot like the old HFS, although its ability to recreate the bang-up HFS stock market returns of old in the coming decade remains to be seen. For starters, it's a lot bigger than the old HFS. Even though its share price is roughly unchanged from where it was after the accounting scandal in late 1998, Cendant still sports a market capitalization close to $10 billion, making a potential double or triple over the next few years a pretty steep challenge. However, the outstanding cash generation ability of the franchising model remains intact, and the company appears to be concentrating on growth in its core competency areas. The problem for Silverman and the rest of Cendant's management team will be getting investors to buy into what essentially amounts to the HFS story again, only with the Cendant taint. Judging from the psychological tarnish that remains with the Cendant name to this day and perhaps forever, that will be a hard sell.
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