Cendant: The Anatomy of Sell and More

Minyanville.com - October 28, 2005

The Anatomy of Sell Buying stocks is easy, selling them less so. Therefore, in light of the Cendant (CD) news today, I thought it might be helpful to briefly look at the reasons we sold Cendant stock awhile back. Perhaps this short exercise can help illustrate the fundamental discipline involved in making sell decisions.We sold Cendant stock awhile back for the following reasons:

Wall Street did not care about company’s business model. The company was going through its “simplification” phase as it was shedding the uncomplimentary businesses, PHH and Wright Express, thus we were willing to wait. However, when CD sold its marketing business – the last “uncomplimentary” business, and Wall Street did not care (the stock did not budge) – that was a sign that Wall Street did not like CD’s business model, thus it will not price it at a higher multiple.

One of the premises for buying CD was P/E expansion – we did not feel that would happen. (I think this is in part what motivated CD’s management to break up the company... realization that the stock will be “cheap” forever as Wall Street doesn’t care for its business model. We did not like real estate business.

We never saw a synergy between the real estate business and the rest of the company. How does real estate relate to car rentals, travel and hospitality? Also, in the last quarter all growth in sales in the real estate franchise came from higher housing prices with no volume (number of houses sold) growth. Thus a decline in housing prices, something we expect a lot sooner than later, would cause a disproportionate decline in earnings due to operational leverage; remember leverage works both ways.

Reducing our exposure to discretionary spending. After stress testing our portfolio to the risk of a discretionary spending slow down, CD came out on top of the list as its travel and hospitality businesses have a very large discretionary spending component.

Minyanville.com - November 10th, 2005

Mailbag: The Spin on Cendant

Vitaliy,

I read the note that you wrote about why you sold Cendant (CD) prior to the announced break up. Now that the company is going to split into four parts and since you previously believed the company was grossly undervalued, have you thought about wading back in? I've come across some sum-of-the-parts valuations which place a value of $22 - $27 per share on the company and at its current price that would be a discount of roughly 20 to 35 percent. I believe it is undervalued; however, I worry about the combination of being at the peak of the business cycle, pricing pressure, and slackening demand in all of their businesses. Any general thoughts that you may have would be welcome.

Thanks, - Chandler

Dear Chandler,

You are exactly right. I can see how CD could work out - absolutely. However, I share the same concerns and I believe that time is CD's biggest enemy. Given enough time, the housing market may decline (arguably not far around the corner), thus creating more uncertainty about the price it'll get for its real estate business.

Economic slowdown, caused by weakening consumers, is likely to impact the travel business and the multiple it will receive when sold. The stock would not worry me that much at this level (not advice) but the upside you mentioned may or may not be there. Looking briefly at discounted cash flows, the stock does look very cheap, but my level of confidence about cash flows is not very high.

- Vitaliy N. Katsenelson, CFA

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