Betting on the Reaper

Benj Gallander and Ben Stadelmann
Friday, April 11, 2003

One fascinating aspect of war is how God(s) regularly battles for all sides as each combatant invokes divine intervention.

The god of money also seems to fight on virtually every side during a war. Even in Canada, many business leaders and politicians say this “higher purpose” should have provided enough justification for Canada to join the pitch in Iraq. These misdirected people slough over moral issues, preferring to obsess on the bottom line of missed business opportunities. How very sad that they choose this priority.

US President George W. Bush might have exceeded his military intelligence when choosing a time for the military confrontation. History shows that 18 months after victory the stock market is typically up a robust 30 percent or so. Gee, that would coincide with the next presidential election, wouldn’t it? Not to be cynical, but surely it would have been simpler to have a vigorous economy lead to a compelling majority in the next presidential steeplechase, rather than engaging in the debasing activity of counting chads. Blech!

Amid grisly images of death, we have made another investment in the funeral industry. We did not purchase Stewart Enterprises with combat in mind and bought before the obliteration commenced. As with our previous buy of Service Corp. International, Stewart represents another woebegone enterprise in this hard hit sector and another service provider that seems to be getting its parlour in order.

Caught up in the takeover mania that led this industry to the brink of ruin a few years ago, Stewart has recently pared its debt radically, by over 40 percent to about $550 million (US). The sale of all foreign operations of this US-based outfit was critical to flushing the fat that was constricting the arteries of this operation.

Falling interest rates and a successful refinancing have also been major allies in breathing new life into this corporation. Currently, the company is looking for greater “financial flexibility” by increasing debt somewhat and changing its financial covenants. This money could be used for the recently proposed expansion, and while management insists this will be done in a cautious manner, it does raise a red flag. Especially since cash flow is negative.

Recent earnings and revenue have slipped due to a move by the public towards cremations, and less elaborate burials. A lower death rate than actuarial tables predicted has also hampered revenue. Nevertheless that simply means that more “product” is in the pipeline. That will eventually translate to the bottom line. Despite these conditions, Stewart is profitable, the most recent quarter chirping in at 9 cents a share, on revenue of $76.7 million.

Our purchase price for Stewart, which is listed on Nasdaq, was $3.11 with an initial sell target of $7.34. Currently the stock trades at $2.74, a better deal in our opinion than when we obtained this outfit.

It does not matter which god, if any, reigns; death remains inevitable and that bodes well for this sector. Even classic contrarians agree with that. And all the greenbacks in the world cannot withstand predestination.