Three summer profit hogs in one big company Hotels, rental cars and real estate—you can’t go wrong!

Surf’s up, my friend! It’s July—the height of summer. Independence Day. Barbecues, ball games and trips to the beach.

I figure President Bush’s US$350 billion tax cut should be kicking in nicely for millions of Americans now, too. Wow! All that extra cash to spend and so many places to spend it. This poses two key questions: Where will Americans spend their newfound riches? And which companies will profit most from the summer culture of consumption?

Well, as you know, the month of July is also the peak of vacation season. A time when millions of Americans pack up and pile into planes, trains and automobiles in search of some summer utopia. And not just Americans. July also marks the start of the summer vacation for millions of Europeans and others around the world, making the annual pilgrimage away from home something of a global event this month.

With such a rush of activity, what better way for you to profit than to cherry-pick among the ruins of a downtrodden industry now primed to take full advantage?

Sure, the travel and tourism industry has endured a pretty rough ride in recent months. But cut them some slack. Who wouldn’t suffer a sharp depression from the potent mixture of a worldwide economic downturn, terrorist attacks, a full-blown war in the eternally messed-up Middle East, and of course the SARS epidemic sweeping the globe? I hardly need to remind you of the devastation these developments have wreaked upon the industry.

Down... but not out

But although the industry might be a little sick, it’s not dying. People will always travel. And people will always take vacations. I believe the worst is now over and the threats to the industry are receding. But don’t just take my word for it. At a conference in New York in early June, top executives from the travel and hotel industries stated that this summer is set to beat previous downbeat expectations. They base their confident forecast on a solid Memorial Day weekend, which raised hopes that the trend will continue into the summer. Since the conference, the World Health Organization has further boosted expectations, saying that it believes the SARS virus has now peaked and should start to decline soon.

But the factor that might have the most impact on the American travel and tourism market this summer is the recent decline of the US dollar. Its dramatic slide over the last year means America is now a much more attractive place for foreign visitors. Think of all those European vacationers I mentioned a moment ago. The dollar has sunk by a remarkable 25% against the euro since last summer, and around 12% this year. Canadians and Australians also have considerably more purchasing power, having seen their dollar currencies soar by 16% and 20% against the US dollar this year.

The companies still standing after the depression should soon see a welcome change of fortune. In Cendant Corporation (CD:NYSE), you’ve got a powerhouse company that is one of the frontrunners in the industry. Why?

First of all, the company has proved extremely resilient to severe market shocks in the past. Two weeks before the September 11 terrorist attacks, Cendant was riding high at US$20.61. Like most other stocks, the company got hammered when the markets reopened after the attacks, falling to US$11.03. But by Christmas 2001, the stock had surged back to just under US$20. It also recovered pretty well after the industry suffered a disappointing performance last summer. Had you invested $1,000 in mid July 2002, you’d be up 28% today.

Second, as a multinational company, Cendant can take advantage of a wider industry recovery this summer, because whatever plans the world’s vacation-goers may have, chances are they will involve one of the corporation’s subsidiary franchises.

A wealth of franchises under one umbrella

One of Cendant’s most appealing benefits is that it owns so many different franchises, across several different business sectors, in many countries around the world. This diversification maximizes its chances of turning a profit. Hotels, rental cars, vacation services and real estate are just a few of the sectors in which Cendant owns and operates other well-known companies.

Take the hospitality market, for example. As the world’s largest hotel owner, Cendant is undoubtedly the industry leader. The company owns almost 6,500 hotels across the world and is the parent company of nine chains, including Ramada, Days Inn and Howard Johnson. This is arguably Cendant’s most important division, so in hopes of attracting more families this summer its franchises are offering a variety of incentives.

Days Inn recently launched its “Sizzlin’ Summer Days” promotion (which offers free children’s meals and, in a cross-promotional effort, discount coupons for two other Cendant franchises—Budget car rentals and Resort Condominium International vacation homes). Howard Johnson’s promotion—“Celebrate Family Memories”—goes a little further, including free children’s meals, children’s scrapbooks, games, posters, and discounts on future hotel bookings, Budget rentals and Discovery.com purchases. In addition, all children under 18 stay free at Howard Johnson when rooming with their parents.

Cendant also just signed a deal with Newtek Small Business Finance Inc. that will enable its hotel franchises to apply for extra funding to carry out building construction, renovation and upgrades.

Get those wagons rollin’

But Cendant’s industry leadership doesn’t stop at hotels. The company is also the world’s largest provider of car rental services—another sector that should see a healthy increase in activity this summer.

Although sector revenue declined slightly last year, it is now primed for a recovery. Airport traffic is steadily increasing again, with the low-budget airlines helping to get people back on planes. Cendant believes the gradual improvement of the business travel market is also helping the sector to bounce back. This could lead to brisker trade at the car rental desk, where Cendant owns and operates the Avis and Budget franchises.

Avis in particular offers attractive new features. It recently installed global positioning technology (GPS) in 3,000 cars in Florida, California and Nevada (all major vacation destinations). Cars are also equipped with the OnStar navigation and roadside assistance system. In addition, 7,000 Avis cars in 30 US cities now have XM Satellite Radio—a service that provides 101 digital music, sports and talk radio stations. With almost a million subscribers, XM is America’s leading satellite radio provider and will become highly visible in many of the leading car brands later this year. Avis is the world’s second-largest car rental company, with around 2,000 locations around the globe, and was ranked as the top company among 158 in a 2002 customer survey.

Your one-stop Cendant travel operator!

Ready to book your holiday? Cendant is the parent company of CheapTickets.com and Lodging.com—two of America’s leading discount travel and vacation websites. Both services allow customers to book flights, hotels, rental cars, cruises and other leisure reservations. Having just agreed to a joint partnership with Carlson Hotels, Lodging.com is poised to increase its market share dramatically this summer. Carlson owns several hotel chains, including Radisson and Country Inns & Suites. This agreement gives Lodging customers instant access to almost 900 more hotels at discounted rates.

Add all this up and you’ll see Cendant could easily be a part of vacationers’ plans from start to finish. First, you book your flight and hotel online with CheapTickets.com or Lodging.com. Then you pick up your Avis or Budget rental car and drive to your holiday lodgings. Hey presto—Cendant turns a very nice triple play of profits!

As if that weren’t enough, Cendant is also the world’s largest real-estate operator. This is a market that seemingly refuses to back down. Sales of new homes rose 2% in April, while existing home sales climbed by 6%. This represents the third and fifth highest monthly results in history. Rather than declining, the US housing market so far this year looks set to match the record-breaking 2002 numbers. Moreover, US demographics suggest the long-term outlook is very positive. The president of Century 21, a leading real-estate company, says Americans create 1.25 million new households each year—many of them moving into new homes. Better still… if the Federal Reserve reduces interest rates down to 1% at the end of June (as is expected), that should ensure the boom is sustained for a while yet.

All of which is good news for Cendant, since it owns two of the biggest names in real estate. Century 21 is one of them! It has total of 6,600 offices in 25 countries. Cendant also has another big real-estate name under its wing: Coldwell Banker, with almost 100 years of experience and over 3,000 offices in the US.

Poised for a summer breakout

Given the number of leading franchises it owns across different business sectors in countries around the world, it’s no surprise that Cendant’s market cap is a massive US$18 billion. What is surprising, however, is that Cendant’s share price isn’t higher than US$17.66 (as of this writing). But all that could be about to change if this summer brings the spike in profits that I expect to see.

For such a large-cap company, Cendant remains oddly undervalued. Its price-to-earnings ratio is a cheap 17—half the industry average. More tellingly, though, Cendant’s PEG ratio (price-to-earnings divided by annual income growth) is 0.87. Since a figure of 1.0 generally indicates fair value for a company, you can clearly see that Cendant is undervalued. To support this (and in keeping with its reputation as a “value stock”), Cendant expects to continue its strong 14.5% average five-year growth rate for the upcoming five-year period… which would beat its industry counterparts.

Cendant’s strong growth outlook comes from an impressive sales record. In the last 12 months, sales totaled US$15.6 billion, translating into a price-sales ratio of 1.17, which is a pretty good indication that Cendant is a robust value company. Over the same period, Cendant investors have scooped up US$1.03 earnings per share. Moreover, I like what Cendant is doing with its cash flow (on the balance sheet, you’ll find this under EBITDA—earnings before interest, taxes, depreciation and amortization). With US$4.6 billion available, the company is using a sizeable chunk to pay down its debt. It recently bought back almost US$400 million worth of bonds, and expects to reduce its debt load by US$1 million by the end of the year. This savvy business plan gives the company a very healthy current return-on-equity of 12%.

Revenues rose by 56% to over US$4 billion in the first quarter. This gives the company a healthy profit margin of 7%. But what struck me more was that these gains came in an off-peak travel season, and one in which the industry was weighed down by the SARS outbreak. There’s reason to think there’s bigger and better things to come in the summer season. The market thinks so too. Cendant has had an average daily volume of around 5.5 million over the last three months. But volume has increased by almost half a million during the first two weeks of June, resulting in five new 52 week highs. Is this a sign that more investors are viewing Cendant as a good buy as summer approaches? I think so. What’s more… they’re right.

Buy Cendant (CD:NYSE) between US$16.50 and US$17 and prepare to hold throughout the summer.