Note to the Reader: All new or revised material since the last report is highlighted.
Reason for Report: Spin off and coverage dropped by broker PreviousEdition: June 9,2006
Overview
Based in New York, Cendant Corporation (CD) is the leading provider of complementary consumer and business services across six business segments: Real Estate, Hospitality, Travel Distribution, Vehicle Services, and Financial Services, Mortgage Marketing Services. The company’s Real Estate Services division operates four brandedreal estate brokerage franchises, provides homebuyers with mortgage, title and closing services, and facilitates employee relocations. The company’s Hospitality segment operates nine lodging franchises, three timeshare developers and a leading timeshare exchange service. CD’s Travel Distribution segment provides global distribution and computer reservation services to airlines, hotels, car rental companies, and travel agencies. Vehicle Service operations include Avis and Budget car rental agencies, PHH Arval fleet management service and Wright Express, the largest domestic provider of proprietary fuel card services. Financial Service operations include the second largest taxpreparation service in the U.S., Jackson Hewitt, as well as insurance-based consumer products and enhancement packages for financial institutions.
The company announced on Oct. 24, 2005 that it will be split into four different companies. Cendant will spin off 100% of the equity of the three new companies to its shareholders in the summer of 2006. One company will consist of Cendant's hospitality businesses, including the Ramada, Howard Johnson, and Days Inns hotel brands. The other three will focus on: real estate, including the Century 21 and Coldwell Banker brands; travel booking, including Orbitz, Galileo, and CheapTickets brands; and the Avis and Budget car-rental businesses. Its website is
Key Positive Arguments / Key Negative ArgumentsExpected Spinoff– Analysts expect the spinoff to be accretive and share price to increase post spinoff. / Integration problems- CD acquired a number of companies, which they have to integrate to generate organic synergies.
Strong Cash Flow and Declining Debt – The service fee business is a cash generator, and this limits downside risks. Analysts like CD’s shareholder-friendly capital deployment. CD is expected to use rising cash to pay down debt and repurchase stock. / Exposure to Potential Travel Disruptions- Investors are counting on a rebound in the company’s travel related services to offset anticipated weakness in real estate, but its reliance on a resurgent travel market leaves the company vulnerable to political disruption.
Focus on Organic Growth – Analysts appreciate management’s focus on organic growth. / Decline in Real Estate - Higher interest rates, an aging housing cycle and a lackluster job scenario are decelerating growth in CD’s real estate services.
Improving Balance Sheet – CD has an improving balance sheet and maturity profile. / Increased Competition – Increased competition in the timeshare business, specifically from brand developers who benefit from lower customer acquisition costs.
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Note: Cendant Corporation’s fiscal year ends on December 31.
Recent Events
On July 31, 2006 CD announced that they have completed spinning off Realogy Corp. and Wyndham Worldwide Corp. They announced the distribution of 100% of Realogy and Wyndham to shareholders as of July 21, 2006. Cendant currently has about 1 billion shares outstanding. They said that about 250 million Realogy shares and about 200 million Wyndham Worldwide shares have been distributed.
On June 30, 2006CD announced that it would sell Travelport, the company's travel distribution division, to an affiliate of the private equity group, in a $4.3billion cash deal.
On May 11,2006 The Cendant Timeshare Resort Group Inc. has changed its name to take advantage of the Wyndham brand Cendant Corp. The Orlando-based time share company and parent of Fairfield Resorts and Trendwest Resorts has been renamed Wyndham Vacation Ownership Inc.
On April 26, 2006 Cendant has swung to a first quarter profit on a 7% rise in revenue, and announced its plan to split into four separate companies remains on track.
On April 25, 2005 Cendant Travel Distribution Services (TDS), a division of Cendant Corp, announced a multi-year agreement that provides Virgin Blue Airlines with Cendant TDS' next-generation Passenger Services System (PSS), aiRES. Virgin Blue is the third high-profile customer to sign-up for aiRES, which provides airlines the most innovative and flexible technical foundation to fully support their business and the efficiency needed to compete in today's ever-changing airline industry.
On April 25, 2006 Cendant Corp. hopes to arrange a possible sale of its travel-distribution business by July or August for as much as $4.5 billion and is preparing to send information packages to 20 different private-equity firms ahead of a possible auction.
On April 24, 2006 CD launched an auction for its travel business, as the property and leisure conglomerate attempts to rescue its ill-received plans for a break-up into four separate companies. The decision to sell the unit could be worth $4 billion including the Galileo reservations system and the Orbitz online travel website. Further, the company announced that it is considering a sale of its travel services division, including the Orbitz and CheapTickets websites, to help in paying down debt, as an alternative to a planned spinoff.
Revenue
In 1Q06, revenue totaled $4.0 billion, an increase of 7% over 1Q05, reflecting growth across each of the Company's core operating segments.
Realogy(formerly Real Estate Services) –Realogy revenue increased 1% yearoveryear. Revenue increased, primarily due to the acquisition of Texas American Title Company and related companies in January 2006. In the real estate franchise and NRT real estate brokerage businesses, home prices increased 9% and 6%, respectively. These increases were offset by closed side’s decreases of 10% and 6%, respectively (excluding the impact of a previously disclosed, one-time benefit at real estate franchise in the first quarter 2005). The decline in closed sides volume reflects the expected moderation of the residential real estate market, particularly in some of the areas where NRT is more concentrated such as Florida and California, partially offset by the impact of tuck-in acquisitions at NRT.
One analyst (JMP Sec.) expects a continuing decline in national real estate sales activity in 2006 leading to an overall decline in Realogy revenues by 2.0%.
Hospitality Services – Revenue increased 4% yearoveryear. Revenue increased primarily due to growth in the lodging business. The largest contributor to revenue growth was the inclusion of approximately $31 million of revenue associated with the acquisition of Wyndham Hotels and Resorts, which also contributed $2 million to EBITDA. Lodging revenue was also positively impacted by a 10% improvement in RevPAR, excluding Wyndham Hotels and Resorts.
Timeshare Resorts – Timeshare Resorts’ revenue increased 11% yearoveryear, primarily dueto growth in Timeshare sales and increased consumer financing income. In addition, revenue was negatively impacted by the adoption of a new accounting standard for the recognition of Timeshare sales revenue and expenses (SFAS No. 152). Excluding the impact of this item, revenue increased 18%. Growth in Timeshare sales revenue was driven by a 7% increase in tour flow and a 9% increase in revenue per guest. Revenue per guest benefited from increased sales of premium inventory, and tour flow was positively impacted by the continued development of the Trendwest in-house sales program and continued improvement in local marketing efforts.
Avis Budget (formerly Vehicle rental)–Revenue increased 13%, primarily due to growth in the domestic and international car rental operations. Car rental revenue grew 15% worldwide due to a 13% increase in rental day volumeand a 1% increase in time and mileage revenue per day.
Travel Distribution Services – Revenue increased 17%year over year,primarily due to growth in online travel agency and other consumer travel businessesand in theglobal distribution services (GDS) business. On an organic basis, online travel businesses grew worldwide gross bookings by 27%. In addition, revenue from GDS and supplier services increased 5%, driven principally by a 7% increase in worldwide air booking fees, partially offset by decreased subscriber fee income. Year-over-year segment results are not comparable due to the acquisitions of Gullivers on April 1, 2005 and ebookers on February 28, 2005, which contributed a total of $66 million to revenue.
For 2Q06, the company expects revenue from core operations to increase 4% - 6%.
Revenue($MM)2004A / 2005A / 1Q06A / 2Q06E / 3Q06E / 4Q06E / 2006E / 2007E
Real Estate Services / $6,552.0 / $7,141.0 / $1,425.0 / $2,017.1 / $2,081.4 / $1,627.2 / $7,150.7
Mortgage services / $700.0 / $46.0
Hospitality services / $1,340.0 / $1,527.0 / $409.0 / $456.5 / $451.3 / $389.7 / $1,706.6
Timeshare Resorts / $1,544.0 / $1,735.0 / $407.0 / $480.9 / $533.2 / $491.9 / $1,913.0
Travel Distribution / $1,788.0 / $2,429.0 / $645.0 / $775.2 / $770.9 / $731.4 / $2,922.7
Vehicle Services / $4,708.0 / $5,316.0 / $1,319.0 / $1,304.6 / $1,517.4 / $1,338.1 / $5,479.2
Corporate and Other / $57.0 / $42.0 / $12.0 / $11.5 / $11.5 / $11.5 / $46.0
Total Revenue / $16,689.0 / $18,236.0 / $4,217.0 / $5,077.2↑ / $5,402.5 ↑ / $4,627.3↑ / $19,323.9↑ / $20,200.0↑
Digest high / $16,689.0 / $18,236.0 / $4,217.0 / $5,226.5 / $5,475.0 / $4,707.5 / $19,588.3 / $20,200.0
Digest low / $16,689.0 / $18,236.0 / $4,217.0 / $4,865.0 / $5,295.1 / $4,471.4 / $18,848.5 / $20,200.0
YoY growth / 9.3% / 8.8% / 7.2% / 7.1% / 7.2% / 6.0% / 4.5%
Sequential growth / -2.3% / 20.4% / 6.4% / -14.3%
Margins
Realogy - EBITDA declined 25%, primarily because of higher fixed costs at NRT in the seasonally weakest first quarter.
Hospitality Services -EBITDA decreased 7% yearoveryear. EBITDA was negatively impacted primarily by the absence of a previously disclosed $7 million gain on the sale of an investment within the lodging business in 1Q05.
Timeshare Resorts - EBITDA increased 68%, primarily due to growth in Timeshare sales and increased consumer financing income. Additionally, EBITDA was positively impacted by a timing benefit due to the adoption of a new accounting standard for the recognition of Timeshare sales revenue and expenses (SFAS No. 152). Excluding the impact of this item, EBITDA increased 38%.
Avis Budget-EBITDA decreased 17% year over year. EBITDA comparisons were negatively impacted by increased fleet costs for newer vehicles and 13% growth in the car rental fleet to support increased demand.
Travel Distribution Services – The acquisitions of Gullivers contributed to EBITDA, while the acquisition of ebookers reduced EBITDA by $13 million. On an organic basis, the online travel businessesachieved higher EBITDA margins. Additionally, EBITDA comparisons were negatively impacted by higher expenses at GDS, including infrastructure improvements to support growth, higher technology costs in online businesses and $7 million of separation costs.
For 2Q06, the company expects EBITDA from core operations (before separation costs) to increase marginally as compared to 2Q05. CD expects EBITDA (before separation costs) to increase at Hospitality Services and Timeshare Resorts, to be flat at TDS, and to be down at Realogy and Avis Budget, consistent with the company's prior expectations, many of which were discussed at its Investor Day on March 21, 2006.
Margins / 2004A / 2005A / 1Q06A / 2Q06E / 3Q06E / 4Q06E / 2006E / 2007EEBIDTA / 17.2% / 13.6% / 10.1% / 15.1% / 16.6% / 11.7% / 13.6% / 13.5%
Pre-Tax / 12.3% / 7.4% / 4.6% / 9.9% / 11.8% / 9.1% / 9.2%
Net / 8.2% / 4.8% / 3.2% / 7.0% / 8.3% / 6.4% / 6.5% / 6.4%
Earnings per Share
In 1Q06, EPS from continuing operations was $0.13, as compared to $0.06 in 1Q05. However, after excluding separation costs, EPS from continuing operations was $0.16.
One analyst (MorganStanley) has lowered 2006 and 2007 EPS estimates by $0.10 to $1.21 and $1.36, respectively. Another analyst (Thomas Weisel)has reduced FY06 EPS from $1.36 to $1.30 based on lower Realogy margins.
For FY06, analysts’ EPS estimates range from $0.11to $1.26, with the average being $0.96. For FY07, analysts’ EPS estimates range from $0.16 to $1.47, with the average being $0.98.
EPSFiscal year ends Dec / 2004A / 2005A / 1Q06A / 2Q06E / 3Q06E / 4Q06E / 2006E / 2007E
Digest High / $1.28 / $1.28 / $0.13 / $0.40 / $0.49 / $0.34 / $1.26 / $1.47
Digest Low / $1.28 / $1.28 / $0.13 / $0.33 / $0.40 / $0.24 / $0.11 / $0.16
Digest Avg. / $1.28 / $1.28 / $0.13 / $0.37↓ / $0.45↓ / $0.28↓ / $0.96↓ / $0.98↓
YoY growth / 0.0% / 116.7% / -0.9% / 1.5% / 20.3% / -25.2% / 2.0%
Zacks Consensus / $0.35 / $0.44 / $1.22 / $1.25
Management Guidance
Target Price/Valuation
Of the seven analysts covering CD, four have positive ratings and threehave neutral ratings and none gave a negative rating. One analyst (CIBC) has dropped its coverage on CD.
The target prices by analysts covering CD range from $2.75 (MorganStanley) to $20(JMP Sec.), with the average being $10.86 (↓from $19.95 published in the previous report). The analyst with the lowest target pricehas used DCF Analysisestimateto compute the target price.
Rating DistributionPositive / 60%
Neutral / 40%
Negative / 0%
Digest High / $20.00
Digest Low / $2.75
Avg. Target Price / $10.86 ↓
No of the analysts with the target price/ Total no of the analysts / 4/5
Capital Structure/Solvency/Cash Flow/Governance/Other
The company announced on Oct. 24, 2005 that it will divide into four different companies. Cendant will spin off 100% of the equity of the three new companies to its shareholders in the summer of 2006. One company will consist of Cendant's hospitality businesses, including the Ramada, Howard Johnson, and Days Inns hotel brands. The other three will focus on: real estate, including the Century 21 and Coldwell Banker brands; travel booking, including Orbitz, Galileo, and CheapTickets brands; and the Avis and Budget car-rental businesses.
In 1Q06, CD generated net cash from operating activities of $243 million and free cash flow of ($83) million. CD utilized $243 million of cash to repurchase shares ($221 million net of proceeds from option exercises).
During the first quarter, the company acquired Baymont Inn & Suites, a mid-scale lodging brand with a system of 115 franchised properties. Further, the company completed $3.375 billion of financing, including the issuance of senior notes and new revolving and term loan facilities, at Avis Budget Car Rental to permit Avis Budget to finance its operations on a standalone basis.
Potentially Severe Problems
Intense competition at Travel Distribution Services, higher-than-expected marketing and advertising spending and ongoing weak demand environment in Europe are some of the factors which will pressure the company in the nearterm.
Long-Term Growth
Analysts project long-term growth ratesranging from 10% to 15%, with an average of 13.3%.
The long-term secular growth outlook for Cendant is dependant on the real estate and travel industries, each of which operates in distinctly different cycles. Analysts expect positive long-term demographic trends to favor growth in both the travel and real estate industries. Customers demand the security of home ownership while simultaneously pursuing more leisure activities. The secular diversity of the real estate and travel businesses should be a long-term positive for the company.
Cendant shareholders are likely to benefit over the long term from a strategic shift in management’s focus toward operational profitability, and a more shareholder-friendly allocation of free cash flow. In the past, the company actively pursued growth through acquisition strategy to capture share and generate synergies from the integration of complementary businesses. Should the company remain focused on organic growth, operational profitability and shareholder-friendly capital allocations, the long-term outlook for the stock appears favorable. However, the largest risk to sustainable long-term growth for an operationally-focused Cendant lies in the company’s ability to retain the value and identity of its large portfolio of respected brands.
Upcoming Events
August 9: 2QFY2006 Earnings Announcement
Individual Analyst Opinions
POSITIVE RATINGS
JMP Sec. – Market Out Perform ($20 – target price): Report date 04/28/06 –The firm rates CD Market Out Perform with a price objective of $20. INVESTMENT SUMMARY: The firm believes current price level presents an attractive point for the stock. It expectsdemand for online travel particularly in international sector to remain strong. Further, itremains cautious with regard to Cendant’s growth prospects going forward as the analyst anticipates a prolonged process to correct current problems. Moreover, itremains concerned about highly competitive pricing environment in the online and offline travel service and distribution segments.
Lehman – 1- Overweight ($2.95 – target price): Report date 08/01/06 – The firm rates CD Overweight with a price target of $2.95. INVESTMENT SUMMARY: The firm views CD’s shares as undervalued.Itbelievessum of the CD parts will be realized by the end of 2006 as the spinoffs occur.
MorganStanley – Overweight ($2.75 – target price): Report date 08/01/06– The firm has reduced the target price from $19 to $2.75. INVESTMENT SUMMARY: They believe thatCD is a leader in markets thatare large and fragmented. The core travel and real estatebusinesses are driven by strong demographic trends andattractive consumer spending patterns. Theyopine that thecompany’s recently announced break-up into four parts is agood judgment from a value-maximization point. Moreover, theyexpect spun off companies to pursue leverage recapitalization, representing an additional upside to the stock.
NEUTRAL RATINGS
Zacks Investment Research – Hold: ($17.75 – target price): Report date 05/03/06–The firm rates CD Hold with a price target of $17.75. INVESTMENT SUMMARY: It maintains a Hold rating on Cendant. Itis encouraged by the management’s decision to split the company. However, the firm remains concerned about the difficult near-term outlook.
Thomas Weisel – Peer Perform: Report date 07/31/06 –The firm rates CD Peer Perform. INVESTMENT SUMMARY: It is positive on CD’s performance in domestic e-Travel unit, and has increased the interest in the Travelport unit which will bespun off in October. Itbelieves CD’s stock is trading at the low end of the range, but finds it difficult to argue for multiple expansion or upward estimate revisions in the near term based on a wide range of headwinds and limited visibility across several key units.
COVERAGE DROPPED
CIBC: 06/30/06 - The firm has dropped coverage due to realignment of Internet travel universe.
Citigroup: 08/01/06– The firm has dropped coverage because the company spun-off majority of its operating business.
Goldman: 08/01/06- The firm has dropped coverage because the company spun-off majority of its operating business.
Copy Editor: Sudeshna. S.