Cendant's 1Q Earnings Beat Wall Street Estimates

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Continuing its rebound from the reporting of potential accounting irregularities April 16, Cendant Corp. posted preliminary first-quarter results last week that beat Wall Street expectations and reflected record gains in areas not affected by the accounting problems.

These results and quarterly and annual results for 1997 may require restatement once an internal investigation of accounting practices in the membership division of the former CUC International is completed. Such restatement is expected during the summer.

Cendant, Parsippany, NJ, reported preliminary earnings per share (EPS) of 26 cents, beating analysts' consensus of 25 cents. More than 80 percent of Cendant's net income of $229.5 million for the first quarter of 1998 came from business units not affected by the accounting problems. Net income in these units increased 108 percent over a year ago to $189.1 million while revenue in these units jumped 35 percent to $699.6 million.

"Excluding certain former CUC businesses where we are not presenting comparative results, first-quarter results were extraordinarily strong,'' said Cendant president and CEO Henry Silverman. "Results reflect virtually all internal growth as there were no material acquisitions in these segments.''

Silverman stressed that these results clear up two misperceptions about the company: that its growth is built on acquisition and that accounting problems reflect a company meltdown.

"It did result in a stock meltdown,'' he said. "When we restate first-quarter 1997, our guess is that first-quarter 1998 EPS will be up between 50 and 60 percent year to year. We're not aware of any nontech company of our size with this rate of growth.''

Cendant stock reacted to the report May 5 by falling 88 cents to $24.56.

The company continues to expand through acquisition, although Silverman said the May 1 announcement of its intention to purchase the RAC Motoring Services subsidiary of Royal Automobile Club, London, for $750 million in cash should the last takeover for this year.

"That's really it for us in the UK right now,'' he said. "With the [pending] ABI purchase we have completed the strategic part of our external growth plan for the next 12 months or so.''

Following its business model for consolidation, Cendant will combine RAC's roadside assistance division with the Green Flag division of recently acquired National Parking Corp. (NPC), Manchester, England, and RAC's Mechanical Breakdown Insurance with warranty products from its pending acquisition of American Bankers Insurance, Miami.

The NPC and RAC purchases give Cendant a retail database of roughly 2 million addresses in the UK. Silverman said cross-selling opportunities could generate 200,000 new prospects a year.

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