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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Cendant Proves Accounting Troubles Are Like Roaches
Accounting problems are like roaches. You may see just a few, but there are almost always more lurking in the woodwork, ready to scuttle out without notice. That's why it's usually a good idea for investors to simply get out of the way at the first sign of real ickiness and stay out of the way until the exterminators (the accountants) have blasted away and the inspectors (the SEC) have given the all-clear.
Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %>, a marketer of club memberships and franchisor of brand name businesses such as Ramada Inn, Avis, and Century21, offers a case in point. Just two weeks ago, this page one accounting disaster story looked like it had come to a conclusion. Chairman Walter Forbes, the head of the former CUC International where the alleged accounting fraud occurred, had been ousted and the rest of the sullied board members and executives had resigned. Accountants Deloitte & Touche and Arthur Andersen had combed through the books and caused results to be restated for the last three years. Meanwhile, Henry Silverman, the company's CEO and new Chair, had suffered insomnia, indigestion, and other indignities, but for a smart guy who seems to have been caught napping, his reputation was surprisingly intact. So with the bugs zapped, investors re-entered the house.
A bit too soon, as it turned out. This morning, Cendant plunged another $2 9/16 to $12, a new 52-week low, on word that the company's audit committee would today release a report blaming Forbes and former vice chair E. Kirk Shelton for the original troubles and, more important, that the SEC had found wholly new problems with the company's accounting. It seems that when Cendant discussed its proposed earnings restatements with the SEC, the commission's staff found it didn't like the firm's revenue recognition policy for individual memberships. This new hurdle comes as a surprise because it represents a challenge to Cendant's longstanding revenue recognition policy and one approved by the auditors and conforming with Generally Accepted Accounting Principles (GAAP).
These new challenges apparently don't affect Cendant's cash flows, and the company says the issues in question are unrelated to the alleged fraud. But today's revelation introduces new uncertainty for Cendant investors, many of whom now seem simply disgusted with this company, whose stock is down 71% since April. With accounting problems real and rumored knocking down countless other stocks of late, investors should heed the varied lessons from Cendant's travails. First, even Wall Street darlings can suffer from apparently fraudulent bookkeeping. Second, the approval of auditors may not mean much. Third, if you see one roach, you can bet there are more hiding in the walls. Finally, a company's accounting can comply with GAAP and still not pass muster with the SEC. Makes you wonder how busy the SEC might be if they had enough staff to review every company's filings.
TV and radio network operator CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> rose $11/16 to $27 7/8 after announcing it will offer up to a 20% stake in its radio and outdoor advertising businesses in an initial public offering before the end of the year. The new entity will be called Infinity Broadcasting -- the name of the radio network CBS acquired in 1996. The company also said it will "likely" take a $50 million to $70 million restructuring charge in fiscal Q3.
Toaster maker Toastmaster <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TM)") else Response.Write("(NYSE: TM)") end if %> popped up $5/16 to $6 7/16 after Juiceman and Farberware kitchen products designer Salton/Maxim Housewares <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SALT)") else Response.Write("(Nasdaq: SALT)") end if %> said it would buy the company for $53.2 million in cash and about $47.9 million in assumed debt. The deal values Toastmaster at $7.00 per share, or a 14% premium to its closing price of $6 1/8 per share yesterday.
Portland, Oregon-based electric utility PacifiCorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPW)") else Response.Write("(NYSE: PPW)") end if %> gained $15/16 to $22 15/16 after appointing former Dow Chemical Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOW)") else Response.Write("(NYSE: DOW)") end if %> executive Keith McKennon as its new CEO. McKennon has served as PacifiCorp's chairman since 1994.
Cheerios cereal and Betty Crocker baking products maker General Mills <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIS)") else Response.Write("(NYSE: GIS)") end if %> climbed $1 15/16 to $65 1/2 following an upgrade to "accumulate" from "hold" by Prudential Securities.
Drug developer ISIS Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISIP)") else Response.Write("(Nasdaq: ISIP)") end if %> picked up $3/4 to $10 after the FDA approved its Vitravene drug for the treatment of cytomegalovirus retinitis, a disorder common in AIDS patients that can lead to blindness and other eye problems.
Medical tissue cohesive products maker Closure Medical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLSR)") else Response.Write("(Nasdaq: CLSR)") end if %> gained $2 1/16 to $23 13/16 after the FDA approved the company's Dermabond adhesive as an alternative to sutures, staples, and bandages for closing certain types of cuts and wounds. Johnson & Johnson's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> Ethicon subsidiary holds the worldwide marketing and distribution rights for Dermabond.
Martinsville, Virginia-based MainStreet Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSBC)") else Response.Write("(Nasdaq: MSBC)") end if %> jumped $8 3/4 to $34 1/4 after agreeing to be acquired by fellow banking company BB&T Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBK)") else Response.Write("(NYSE: BBK)") end if %> for $554.3 million in stock, or $38.87 per MainStreet share. BB&T fell $1 5/8 to $30 9/16.
Women's clothing designer St. John Knits <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJK)") else Response.Write("(NYSE: SJK)") end if %> bounced back $1/2 to $19 after falling 30% yesterday following a warning that its fiscal Q3 earnings would fall short of expectations. After the close, the company announced a plan to buy back up to 1 million of its outstanding shares. Bear Stearns also helped out this morning by raising its rating on the company to "buy" from "attractive."
Maxwell Shoe Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAXS)") else Response.Write("(Nasdaq: MAXS)") end if %> stepped up $3/8 to $13 1/2 after the manufacturer of the Sam & Libby and Jones New York brands of shoes reported fiscal Q3 EPS of $0.46, up from $0.35 last year and $0.03 ahead of the First Call mean estimate. Excluding a $900,000 tax benefit for the exercise of certain stock options, EPS came in at $0.43. The company added that it is "extremely encouraged" by its business outlook for the rest of fiscal 1998.
Life and health insurer Provident Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVT)") else Response.Write("(NYSE: PVT)") end if %> provided its shareholders with a $1 1/2 gain to $35 1/4 after the company was chosen to replace Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> on the Standard & Poor's 500 Index. Bay is being acquired by Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>.
Metal processing and distribution services Reliance Steel & Aluminum Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RS)") else Response.Write("(NYSE: RS)") end if %> advanced $5/8 to $30 1/8 after being selected to replace Broderbund Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %> on the Standard & Poor's SmallCap 600 Index. Broderbund is being acquired by The Learning Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLC)") else Response.Write("(NYSE: TLC)") end if %>.
Lighting systems designer SLI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLI)") else Response.Write("(NYSE: SLI)") end if %> tacked on $9/16 to $16 after announcing that its board authorized an unspecified but "significant" share buyback plan.
Laurinburg, North Carolina-based Scotland Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SSB)") else Response.Write("(AMEX: SSB)") end if %> gained $2 3/16 to $11 1/16 after agreeing to be acquired by Centura Banks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBC)") else Response.Write("(NYSE: CBC)") end if %> for $23 million in cash, or $11.75 per Scotland share.
Major U.S. banks headed lower this morning as many may be hurt by Russia's economic woes and debt restructuring plan. J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> dropped $4 15/16 to $113, Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> lost $5 5/8 to $70 7/16, Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> sank $6 7/16 to $78 3/16, Lehman Brothers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %> was hit for a $4 11/16 loss to $53, Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> fell $7 11/16 to $126 3/16, Citicorp merger partner Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> was cut $3 3/8 to $51 1/4, Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> tumbled $3 5/8 to $60 5/8, NationsBank (NSYE: NB) pulled back $3 5/16 to $65 15/16, NationsBank merger partner BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> tanked $4 to $73 5/8, and American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> sold off $4 5/8 to $92 9/16.
Starwood Hotels and Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOT)") else Response.Write("(NYSE: HOT)") end if %> was burned for a $2 1/8 loss to $40 3/8 after announcing it will restructure its operations by ending its grandfathered paired-share real estate investment trust (REIT) status and becoming a corporation. Congressional debate on abolishing the grandfathered paired-share REIT clause has created uncertainty in the market and negatively impacted the company's share price.
Internet search engine and portal company Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> tumbled $4 3/16 to $35 3/16 after The Wall Street Journal's "Heard on the Street" column reported that the way the company booked a one-time charge in connection with its marketing deal with Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> may distort future earnings.
Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> fizzled $3 5/8 to $75 9/16 after Merrill Lynch lowered its near-term rating on the soft drink giant to "neutral" from "accumulate" but maintained its long-term "buy" rating.
Drug maker Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> fell $1 13/16 to $75 5/16 despite receiving FDA marketing approval for its anti-lung cancer agent Gemzar.
Telecommunications holding company Global TeleSystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTSG)") else Response.Write("(Nasdaq: GTSG)") end if %> slid $4 1/8 to $29 1/2 after announcing it will acquire about 5.9 million shares of AmTec <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ATC)") else Response.Write("(AMEX: ATC)") end if %> for $1.35 a share and merge its joint venture in Shanghai into AmTec.
Chancellor Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMFM)") else Response.Write("(Nasdaq: AMFM)") end if %> was tuned out for a $3 1/8 loss to $41 5/8 after announcing it will acquire Capstar Broadcasting Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRB)") else Response.Write("(NYSE: CRB)") end if %> in an all-stock transaction valued at $4.1 billion (including $1.785 billion in debt and preferred stock) that is expected to be accretive to 1999 after-tax cash flow. The combined company will be the largest radio broadcaster in the country.
General Instrument Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> shed $2 15/16 to $24 1/4 after leveraged buyout firm Forstmann, Little & Co. said it will sell or distribute its 12.5% stake in the maker of channel selectors for cable television. The firm also plans to part with its 14.7% stakes in both CommScope Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTV)") else Response.Write("(NYSE: CTV)") end if %>, which lost $3 7/16 to $14, and General Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEM)") else Response.Write("(NYSE: SEM)") end if %>, which slipped $5/16 to $6 11/16.
Lighting equipment, chemicals, textile rental, and envelopes company National Service Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSI)") else Response.Write("(NYSE: NSI)") end if %> plunged $6 7/8 to $40 13/16 after warning it expects fiscal Q4 EPS to approximate last year's $0.72, which would miss analysts' expectations of $0.84. The company blamed the shortfall on lower-than-expected operating margins in its chemical segment and lower-than-anticipated sales in its lighting equipment segment.
Office and presentation and display products maker Hunt Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUN)") else Response.Write("(NYSE: HUN)") end if %> trailed off $1 1/2 to $16 5/16 after announcing it expects fiscal Q3 EPS to exceed the $0.18 it earned a year ago but fall below analysts' mean estimate of $0.31.
Psychiatric and substance abuse facilities operator Comprehensive Care Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMP)") else Response.Write("(NYSE: CMP)") end if %> plummeted $2 15/16 to $6 after reporting fiscal Q4 EPS of $0.31, a penny higher than First Call's estimate by a single analyst.
Music, video, book, and software distributor Handleman Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDL)") else Response.Write("(NYSE: HDL)") end if %> lost $1 1/4 to $7 5/8 after reporting a fiscal Q1 loss of $0.12 per share (before unusual items), compared with a loss of $0.19 in the year-earlier period and analysts' mean estimate of a loss of $0.15.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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