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Daily Trouble
Stewart Enterprises Inc.

Ticker: (Nasdaq: STEI)
Phone: 504-837-5880
Website: www.stewartent.com
Price (9/16/99): $6 1/8

By Paul Larson
Friday, September 17, 1999


How Did it Find Trouble?

One might say that the action in Stewart Enterprises' stock looks like death warmed over. Over the past year, the stock has been left for dead by many investors, and is now trading at a mere fraction of its old highs.

The most recent notable down day for Stewart came on August 12 after the company warned that results for its third and fourth quarters would be far below what analysts expected. Where the company was expected to earn $0.29 per share in the third and $0.25 per share in the fourth quarter, Stewart indicated it would fall short of those estimates by roughly $0.03 and $0.07 in each respective quarter. Needless to say, investors didn't like that one bit.

After starting the year above $20 per share and slowly drifting down to near $10 before the earnings warning, investors cremated Stewart the day after the warning was made. On August 12, Stewart traded more than 26 million shares, roughly 25 times its normal volume, and ended the day down nearly 40% to a new annual low and a level not seen since 1993.

As is common with companies profiled in this column, the class action lawyers have since swarmed over Stewart. Their lawsuits claim certain Stewart executives made false and misleading statements about the company's health while simultaneously selling their stock. At the time of this writing, no fewer than 10 different law firms have filed claims against Stewart and the company's executives. As they say, vultures rarely fly over animals that haven't had their share of trouble.

Business Description

Stewart Enterprises is one of the nation's largest funeral services (death care) companies. The firm owns an estimated 633 funeral homes and 157 cemeteries that provide the full range of death care services. Most of Stewart's properties are in the United States, but the company has operations around the globe.

The company is a major consolidating force in its industry, and has largely grown to its current size via acquisition. In general, Stewart will buy family owned operations and retain the local names and traditions of those businesses while consolidating many of the back-office operations into its corporate fold.

Stewart came public in 1991 and is a member of the S&P 400 MidCap index.


Financial Facts

Income Statement
12-month sales: $763.0 million
12-month income: $109.3 million
12-month EPS: $1.03
Profit Margin: 14.3%
Market Cap: $687.2 million

Balance Sheet
Cash and Equivalents: $69.9 million
Current Assets: $334.5 million
Total Assets: $2,379.4 million
Current Liabilities: $118.0 million
Long-term Debt: $921.4 million
Total Liabilities: $1,237.4 million

Price-to-earnings: 5.9 Price-to-sales: 0.9


How Could You Have Seen it Coming?

One warning factor with Stewart was the fact that earlier this year there was some fairly large insider selling. Watching insiders bail is not always a surefire sell indicator. But, looking back, the sale of more than 750,000 shares by the company's chairman takes on great significance.

Of greater importance, there was a real disconnect between what Stewart and its peers in the industry were saying. Other death care companies were warning for some time about anemic fundamentals in the market -- namely a falling death rate and the migration toward lower-cost memorial services, as well as an increase in the number of cremations done relative to burials. Stewart, on the other hand, was saying its fundamentals were sound right up until the earnings warning. Something obviously didn't add up.

The death care industry has not exactly been the healthiest of late. With some others in the industry having major problems, it should have been a wake-up call. The largest death care company, Service Corp. International (NYSE: SRV), had its own blow-up earlier this year, going from above $40 per share to the mid-teens. In addition, another major force in the industry, Loewen Group (NYSE: LWN), filed for bankruptcy earlier this year. These aren't exactly signs of a thriving industry.

Where to From Here?

When one looks at the death care industry, one has to wonder if the dynamics that led to the dramatic downfall of the group as a whole will continue. People will always die, and there will always be a need to serve grieving families. However, cremations are becoming much more popular, and cremations simply don't carry the level of cost (read: revenues) that burials do.

Beyond the market of questionable vibrancy (or death, as the case may be) Stewart now serves, probably the most salient worry for company investors is the significant debt. Any firm with as much leverage as Stewart is going to have its margin of error reduced greatly. The company has managed to stay profitable thus far, but the slightly negative trend and less-than-appealing cash flow dynamics of late have to be worrisome.

Investors also have to consider the class action lawsuits. Even if there is no merit to the suits, they are costly to the company and will also sap some of Stewart's energy. And, if there is some truth to what the lawyers are saying, it will make the Stewart mess that much more complicated.

On the valuation front, it's hard to call Stewart anything but cheap at these levels. The company is trading well below book value, and the stock is trading at roughly 7x forward earnings estimates that have already been watered down after the warning on August 12. However, the questionable health of the industry, combined with the copious amounts of debt, have to make investors extremely cautious, even at these seemingly low prices. In short, it's probably a good idea to just whistle as you pass this graveyard for now.

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