Morningstar Sees Value in Cendant

I will never understand the appeal of Cendant‘s (CD) stock. I think people are determined to see value there no matter what reason and logic say. The stock just took a hit again, on lowered guidance. Here’s part of a new report on Cendant from Morningstar:

Cendant reported fourth-quarter results Monday that were in line with its lowered guidance. The company also reduced its forecast for the first quarter of 2006, citing weakness in its real estate and auto rental divisions. Cendant’s overall revenue and profit expectations for 2006 are consistent with ours, though, and we see no reason to change our $23 fair value estimate. We believe the shares, which have steadily declined in recent months, offer a highly attractive risk/reward trade-off now. Uncertainty is likely to remain high in the near term, owing to concerns surrounding the cooling real estate market, the woeful performance of the travel distribution business (notably online agent e-bookers), and the impending four-way split. Because we are convinced that the core elements of our Cendant thesis still hold–its businesses generate lots of free cash flow and solid returns on capital–we think this uncertainty has created a compelling opportunity for investors. We have reviewed several valuation scenarios and are confident that Cendant is worth $22-$25 per share; in light of recent poor execution and earnings disappointments, we think it’s prudent to err toward the lower end of this range. The real estate and hospitality divisions will be spun off in the second and third quarters, respectively, while the travel distribution arm spin-off will be completed in October.

Posted by on February 15th, 2006 at 10:59 am


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