28 October 2005

Cendant Redux

Now that I think of it, I was a little harsh on Cendant.

I'm not thinking about backtracking much on the bearish anecdotal case on Cendant's businesses. I'm not optimistic about the growth prospects of Cendant's varied businesses. But let's assume that Wall Street has also been quite pessimistic about Cendant's businesses and has priced that into the stock. Let's also assume that the conglomerate discount is priced into Cendant.

As you may have gathered, this is an apologetic post. But I'm not the only one at fault. Morningstar had some bum numbers that put me over the top in my criticism of CD. So let's excuse Morningstar's FCF numbers and look at some figures from SmartMoney.com:

Net Cash from Operating Activities (in $Billions)
2000 - 1.436
2001 - 2.784
2002 - 1.331
2003 - 7.202
2004 - 5.417

Capital Expenditures (in $Billions)
2000 - -.217
2001 - -.349
2002 - -.399
2003 - -.463
2004 - -.469

So if you deduct CapEx from Net Cash from Operating Activities, you should end up with FCF for CD:
2000 - 1.219
2001 - 2.435
2002 - 0.932
2003 - 6.739
2004 - 4.948

So Cendant didn't have a negative $50B cash flow over the past five years; it had a volatile, but positive cash flow in each of the last five years.

If I can let Cendant off the hook, I can cut Morningstar some slack. Especially when they are offering free premium analyst reports this week. Sanjay Ayer, a Morningstar analyst, currently rates Cendant five stars, with a "Fair Value Estimate" of $27.00, and a "Consider Buying" figure of $20.80. Cendant closed today at $17.64, a good $3+ below the bargain-y "Consider Buying" number.

I'm feeling a bit of whiplash, but I'm pulling Cendant out of the proverbial trash (dung heap perhaps?) and placing it onto the Stock Watch List.

This is a good lesson. One should be careful when considering stocks. I neglected to corroborate some damning data. I failed to consult a broad enough array of information resources. Bad me.

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