November 18th, 2006

fox yawn

Fundamental Analysis Friday

Wooden Bridge

The Sleuth sent me a stock recommendation this afternoon that wasn't as well-researched as their usual standards.

Here's their case for saying that Avis Budget (NYSE:CAR) is cheap:
Avis Budget             Stock   Industry
Price / Earnings        3.2     28.2
Price/ Book             .2      4.9
Price / Sales           .1      4.9
Price/ Cash Flow        .8      20.1
Source: Morningstar
In addition, The Sleuth stated that the company pays $4.40 per share in dividends per year, for a dividend yield of over 20%!

Well, I was intrigued, so I did a bit of digging. It turns out that Avis Budget is one of the four pieces resulting from Cendant's breakup earlier this year. Cendant actually is a familiar name to me even though I haven't taken a look at that company for the better part of a decade. Back in 1998, I got some Cendant because they had accounting problems and the stock was temporarily undervalued. Of course, I was taking a bit of a risk back then because I wasn't completely sure of their revised numbers either, but I pocketed a 50% gain from that trade so it worked out okay.

Anyway, the numbers above are skewed because most financial sites are still calculating the ratios based on Cendant's numbers, not the numbers of the portion of the company that became Avis Budget. But we can fix that now because they have posted their 2006 3rd quarter statements here. (Note: This is preliminary. They're expected to post revised numbers on Nov 20 because of additional breakup costs.)

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Anyway, this is not to rag on The Sleuth (although I am ragging on them a little), but to make the point that you need to check the numbers on your own. Do not invest blindly based on stock tips from investment newsletters, Jim Cramer, or your barber. They can all make mistakes.