Cendant’s Ups, Downs; Revlon’s Wrinkles
Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Cendant (CD)
Mike: Now here’s a company that offers us numerous lessons, among them that Wall Street has a very short memory.
Jim: True. Only a few months ago Cendant crashed and burned, plummeting 46% in a single day.
Mike: As well it should have.
Jim: Yet today Wall Street acts as though it never happened. Cendant is a conglomerate run by a New Yorker named Henry Silverman. Most people haven’t heard of him...
Mike: But they’ve heard of most of the companies Cendant either owns outright or has major positions in.
Jim: Most are franchising operations, and they include the franchise rights to Ramada, Days Inn and Howard Johnson in motels; Century 21 and Coldwell Banker in real estate; and a big stake in Avis Rent A Car, most of which it spun off a year ago.
Mike: Before Henry Silverman overreached.
Jim: Yep. Silverman was a classic creation of the ‘90s bull market in the sense that he used the rising value of the stock of his company, which used to be called HFS, to buy these other enterprises--and since he was a darling of Wall Street, that stock continued to rise. Then he bought a company called CUC International, a direct-marketing firm that sells travel and shopping memberships, and changed the name to Cendant.
Mike: Trouble is, Cendant soon uncovered alleged accounting problems and fraud at CUC and realized that in fact CUC was worth a fraction of what HFS had paid for it.
Jim: And on the day all this came to light last April, Cendant’s stock melted down. Suddenly Silverman’s reputation as a brilliant deal maker was badly tarnished.
Mike: But only for a while, and that’s what gets me about this whole saga. Silverman’s already come back. Here’s an example of what I mean: Just before Thanksgiving, Cendant easily sold $1.5 billion of corporate bonds. This was just five weeks after its existing debt was downgraded by both of the major debt agencies and while it was still dithering about how to report its financial results as a result of the CUC disaster and the attendant investigations.
Jim: We should note here, by the way, that Silverman himself isn’t accused of any wrongdoing.
Mike: Still, has everyone already forgotten what happened? And that’s not all. Silverman’s been going around talking about how his job now is to rebuild Cendant. But first, of course, he takes care of himself. Cendant’s board re-priced the stock options awarded to Silverman and its other top executives--which were deeply worthless after the CUC debacle--so that these guys could profit from the stock’s new, much lower level.
Jim: It was outrageous, because his stockholders have no way of getting the same protection.
Mike: The point of stock options is to reward executives for a good performance. So why should they be rewarded if the business tanks and the original options are out of the money? Yet the Cendant board’s move basically allows Silverman and his gang to start from scratch.
Jim: Well, if any investors are thinking of starting from scratch with a Cendant investment, I’d suggest otherwise. Cendant’s businesses have decent growth prospects. And the stock, trading around $19, is relatively affordable at 23 times estimated ’98 earnings. But although Wall Street has a short memory, I believe there are enough institutional investors still wary about this outfit that the stock won’t be jumping much higher any time soon. Yes, Cendant managed to sell those bonds. Its stock is another matter.
Mike: I also have mixed feelings on this stock. There is some potential gain there. But, although the phrase “voting your conscience” gets a bad rap these days--thanks to all those conscientious statesmen down in Washington--I would have to vote my conscience on this stock and say no, thanks.
Jim: Meaning you don’t want to be part of Silverman’s crowd?
Mike: Right. And as you said, there are other reasons to be wary of this stock. Investigations are still pending around CUC. The company faces a host of civil lawsuits. And who’s to say that the CUC debacle couldn’t happen again? Who’s to say that the next time around, Cendant isn’t going to be every bit as slack and fail to do its due diligence before buying a company?
Jim: “Due diligence” being the corporate term for double-checking that the company you’re buying is everything it says it is.
Mike: Right. And as far as I can tell, Silverman’s management team from HFS, which did the CUC deal, is still running Cendant.
Jim: I’m with you. There are lots of stocks to choose from, and I’m not interested in one whose board thinks keeping its CEO in stock-option heaven is a top priority.
Revlon (REV)
Jim: Speaking of executives who don’t sit well with us, we turn to Revlon, which is controlled by the billionaire Ronald Perelman.
Mike: Otherwise known as “the shareholder’s friend”? More to the point, for a company whose business is making women look beautiful, this is one ugly stock. Revlon couldn’t manufacture enough rouge to cover up this mess.
Jim: Revlon was started in 1932 by a group led by Charles Revson, who once said he was in the business of “selling hope in a bottle.”
Mike: I’d say Revlon’s holders are the ones who need big doses of hope right now.
Jim: After selling part of Revlon to the public in ’96 for $24 a share, Perelman to his credit finally turned Revlon around, building it into the leading domestic cosmetics company, with about 30% of the U.S. market. The company’s brands include Revlon, Almay, Ultima II and Charlie, and the company was still growing faster than its rivals when 1998 began.
Mike: Then along came this year’s third quarter.
Jim: Right. Out of nowhere, Revlon said its earnings were going to basically vanish, and the stock’s wheels came off. It now trades around $16, having plunged an amazing 70% just since June to a level that’s well below its initial public offering price of two years ago.
Mike: Now, Revlon’s broad explanation of what went wrong in the third quarter included the requisite blame on overseas economies. But it also blamed delays in new-product launches and big cutbacks by drugstore chains, owing to the chains’ efforts to cut inventories, and the shrinkage in the number of drugstores caused by mergers.
Jim: That explanation doesn’t wash, and it’s just one reason I don’t like this stock. Let’s see: Revlon is the titan of its industry, the brand leader, and it doesn’t see these problems approaching or warn the public about them until it’s flattened by the damage?
Mike: It does strain credulity.
Jim: Frankly, I’m wondering if the third-quarter plunge in Revlon’s earnings doesn’t say something about its own operations, its cost controls, its ability to forecast sales trends, and so forth.
Mike: The cosmetics industry overall, though, is still strong.
Jim: That’s true, and it’s historically been resilient when the economy goes soft. But there’s widespread concern on the Street that competition in the cosmetics business is going to get even more intense in 1999, because the big players will be rolling out lots of new product lines. That could lead to price-cutting as Revlon and the others defend their market shares.
Mike: No question, this is a marketing-driven industry, and the competition is ferocious.
Jim: Just look at all those glossy ads in the magazines, which make it impossible to find the table of contents. Anyway, there’s another reason I’d avoid this stock.
Mike: Would its initials be R.P.?
Jim: It would. Look, this is the quintessential Perelman vehicle: He bought the company with mostly other people’s cash, then made a killing by growing Revlon enough to keep its huge debt under control while boosting the value of its equity--which of course is mostly Perelman’s equity. But from this point forward, I’m not sure his public stockholders’ interests are his first priority.
Mike: Essentially, Perelman’s got his.
Jim: Yep. I know that if Revlon’s stock goes up, so does Perelman’s wealth--he owns 56% of the stock--so there’s obvious incentive for him to keep Revlon in high gear. But the fact is, Revlon still has $1 billion of debt and a negative net worth, it still spends a pretty penny every quarter just paying interest to service all that debt, and that’s not the kind of baggage you want when times suddenly get tough in your business.
Mike: Agreed. Revlon’s continued dominance of this industry, or even its ability to ward off any shrinkage of its market share, is by no means assured, especially if management doesn’t have its hands on the steering wheel.
Jim: Especially when all you’re selling is hope in a bottle.
Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.
