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Minyan Mailbag: The Spin on Cendant


Would you buy real estate on a muddy hill?


Professor Vitaliy,

I read the note (10/24) 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.


Minyan 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.


No positions in stocks mentioned.

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