Oh, how I remember that awful day in 1998. I'd just returned from two months in Spain and was relaxing in a Miami Beach hotel on a layover, when the news hit CNBC. Three Cendant (NYSE:CD) executives had abruptly resigned from the company, including the CFO. The stock had taken a 15-20% hit on the news. I sold some that day, just to cover myself, without really analyzing this news. I guess I wasn't worried. Between my profits on Cendant's forerunner, HFS Inc., and the newly merged company of HFS and CUC International, I was sitting on a triple.
Then I got off the plane the next day in Los Angeles only to see Cendant's stock down another 50% on the revelation of accounting fraud at the company. I pounded my head in disgust. Why did Henry Silverman have to merge his prize with that piece of junk and its chairman, Walter Forbes?
Since the scandal, the stock has never traded higher than $26. Some companies can't seem to shake the taint of scandal; witness Symbol Technologies (NYSE:SBL) and the now-bankrupt Footstar.
In this case, ol' Henry righted the ship, but the market hasn't run back to him. This, despite the fact that Cendant owns brand names in several markets: Orbitz, Avis, Budget, Days Inn, Howard Johnson, Super 8, Trendwest, Coldwell Banker, Ramada, Century 21, etc., etc.
It's almost like investors aren't looking at the gobs of free cash flow Cendant's businesses throw off, the share repurchases the company has made, and its consistent paying-down of debt. Fools love Cendant for these reasons and many more. Yet I think the market is still undervaluing it.
Maybe once the trial of Forbes is over, things will change. It seems like the only rational explanation for why the stock is being held back. Maybe the fact that a previous trial ended with a hung jury kept the scandal alive for investors.
Perhaps the market just sees some kind of risk that I don't. Regardless, it's nice to see that Henry Silverman admitted he'd failed in his due diligence and set about making things right. That's more than I can say for some other companies.
For more, see:
- Are Corporate Directors Next Against the Wall?
- Stocks Fools Love: Cendant
- Mayday! The Motley Fool Manifesto
- Revisiting Cendant
- "We Didn't Know" Is No Excuse
Fool contributor Lawrence Meyers owns no stocks mentioned in this article.
