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  Betting on the Reaper

BENJ GALLANDER and BEN STADELMANN

Friday, October 11, 2002

As U.S. President George W. Bush's cronies weigh the toll of body bags in Iraq against lost votes in a couple of years time, actuarial tables indicate that people are not dropping as swiftly as expected in North America. This is hindering the funeral trade, an industry considered to be recession-proof, and Service Corp. is paying the price. This industry leader has seen its stock price plop to about $2.50 (all figures in U.S. dollars), better than an Olympian undertakeris shovel toss from our target of $13.84.

Fortunately, not all of our investment remained tightly mummified in this holding; within two weeks after our purchase at $4.51 last December, we swiftly turned around and dumped 62.5 percent of our position at $4.81. This uncharacteristically quick sale for only a pittance of a gain was brought on after news broke that one of Service's rogue operators in Florida had been cramming additional bodies into spaces where tenants had already been placed. The government found this mixing and matching of ill-suited bodies abhorrent, and Service is facing lawsuits that, while not Phillip-Morrisian in proportion, cast a possible death pall over the company.

Service is a company that many people thought blossomed in the 1990s, as it outbid competitors to expand at an astounding rate. This rapid growth rendered the balance sheet top-heavy with debt, and asset sales were needed for the outfit to regain its footing. While the house of cards is not quite in order yet, Moody's just gave Service's debt rating a reasonable thumbs-up, far better than another sprinkling of dirt on the casket.

While Service is selling well below the current book value, ongoing losses are depleting this tally. However, the corporationis repayment of almost $2 billion worth of debt since 1999 and refinancing of current liabilities offer some breathing room. Another $500 million in assets are being offered on the market and, if reasonable prices can be achieved, this firm's reincarnation will be near completion.

After a recent review, we determined that it would be worthwhile to dump Service and take the tax loss if we could get $3.29 a share for it. The stock tanked to the current price, and we decided to hold and wait for a possible rebound. It is always difficult to calculate which circumstances will leave more money in the kitty at the end of the day: hanging in, or taking a tax loss against our gains and lowering our tax bill, while contemplating a repurchase after the mandatory 30-day "cooling off" period.

Returning to actuarial tables and the laws of probability, we're sticking with the old saw that the only two sure things are death and taxes. So if people are not deep-sixed now, they will be later. That bodes well for this organization.


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