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Cendant Dives to New Low

W.D. Crotty
February 14, 2006

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