Friday, November 6, 1998
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An Investment Opinion
by Alex Schay

Grave Times for Loewen

OK, you've chosen the Jeopardy category "Industries" for 1000 points, and Alex has just rattled off the answer, "It's not cyclical, there's no seasonality, there is an assured customer base... and with a cemetery at one end of Wall Street it's loved as a defensive investment." Easy.

What is the deathcare industry, Alex?

Few industries can point to one statistic that embodies all that investors can reasonably expect on the demand side of the economic equation, but according to a 1993 report prepared by the Bureau of Census, the number of deaths in the U.S. is expected to increase by 1% per year between 1996 and 2010. The stability that stems from this statistic, coupled with a general lack of inclination on the part of the aggrieved to "shop around," has resulted in an industry that is not characterized by significant turnover and business failure. The bottom line, however, is that the aggregate number of funeral homes and cemeteries in the U.S. remains relatively constant, hence industry growth can only occur through acquisition.

The second-largest operator of funeral homes and cemeteries in North America, Loewen Group (NYSE: LWN) has turned deathly pale over the last year, losing 59% of its equity value. The company reported a third quarter loss of $0.47 per share last night, which reflected a charge for adjustments and write-offs of $0.53 per share -- net this out and Loewen met estimates of $0.06 per share. Loewen was up as much as 5% in early trading, but at midday the firm was up only $1/16 to $10 3/8.

An overly aggressive acquisition scheme has been at the root of Loewen's problems, but is it really time to hammer nails into the company coffin? The firm has been struggling with $2.1 billion in debt, which represents 58% of the company's total financial capital (with common equity at $1.4 billion and preferred at $157 million), and a rising profile of "pre-need" contracts. In the third quarter the firm reported that cemetery results were affected by rises in the allowance for pre-need cemetery receivables and an increase in imputed interest on low interest contracts (reducing cemetery gross profits by approximately $25.7 million, compared with an operating loss of $10 million).

Except for insurance commissions and amounts not required to be placed in trust (which are used to defray initial costs of administration), no income is recognized until the performance of a specific funeral -- which means more volatile earnings when pre-arranged services are on the rise. Loewen reported that it is now going to retrench and focus on maximizing operating numbers off of its existing base of assets. With potential asset sales in the works, thanks to the formation of a Special Committee (composed of independent board members) to evaluate issues related to creating some shareholder value, investors might want to keep an eye on the firm in the coming months.


Online discount broker E*Trade Group (Nasdaq: EGRP) traded up $2 3/4 to $23 3/4 after announcing a partnership with Barclays Global Fund Advisors to offer its own line of mutual funds, starting with low expense ratio index funds, enhanced index funds, and the unfortunately named funds-of-funds.

Biotechnology firm Geron Corp. (Nasdaq: GERN) exploded for a $12 1/8 gain to $22 after research funded and licensed by the company successfully derived human embryonic stem cells, which may be used to supply human cells of virtually any tissue type and lead to new transplantation techniques. The researchers' findings, which are reported in the current issue of Science magazine, were heralded as "a breakthrough of major proportions" by one observer.

Coronary stent and medical device maker Guidant Corp. (NYSE: GDT) advanced $3 15/16 to $82 7/16 after the FDA approved the company's ACS Multi-Link Duet stent system. The new system provides a wider range of sizes, lower profiles, greater deliverability, and enhanced deliverability for vascular surgeons, the company said.

Medical devices designer and maker Respironics Inc. (Nasdaq: RESP) picked up $1 1/16 to $17 after the FDA approved its BiPAP Vision Ventilatory Support System, an economical alternative therapy for treating patients suffering from acute respiratory failure or respiratory insufficiency.

Enterprise capital asset maintenance software developer Project Software & Development (Nasdaq: PSDI) gained $7 3/8 to $28 1/4 after reporting fiscal Q4 EPS of $0.50 versus $0.40 a year ago, whomping the Street's mean estimate of $0.41.

Grocery store operator Safeway (NYSE: SWY) rose $2 9/16 to $49 3/4 on news it will be added to the S&P 500 Index on Nov. 12. Safeway will replace Chrysler (NYSE: C), which S&P deemed no longer worthy of its index based on its pending merger with Germany's Daimler-Benz (NYSE: DAI).

Natural foods grocer Wild Oats Markets (Nasdaq: OATS) harvested a $1 3/16 gain to $27 9/16 after Business Week's unreliable "Inside Wall Street" column speculated that the company may be taken over by rival Whole Foods Market (Nasdaq: WFMI). The column also named Red Roof Inns (NYSE: RRI) as another possible buyout candidate, sending the economy hotel operator's shares up $2 9/16 to $20 3/8.

Property and casualty insurer and reinsurer W.R. Berkley Corp. (Nasdaq: BKLY) climbed $2 5/8 to $33 3/8 after saying it has hired Morgan Stanley to explore strategic opportunities for its regional insurance companies, which may possibly result in the eventual sale of the units.

Telecommunications equipment maker Teltrend Inc. (Nasdaq: TLTN) rose $3 3/4 to $19 after announcing late yesterday it expects fiscal first quarter earnings of $0.40 to $0.42 per share, above analysts' mean estimate of $0.34 and the highest projection of $0.37. The company also plans to buy back another $8 million in shares in addition to its recently completed repurchase of $8 million in shares, or 8% of its outstanding shares.

Managed care provider Foundation Health Systems (NYSE: FHS) gained $2 1/16 to $14 1/2 thanks to a Goldman Sachs upgrade to "trading buy" from "market perform." Yesterday, Superior National Insurance Group (Nasdaq: SNTL) said it has secured the financing to buy Foundation's workers' compensation unit for $285 million, which will allow Foundation to focus more closely on its core managed care business.

Bookseller Barnes & Noble (NYSE: BKS) moved up $3 1/8 to $34 after agreeing to buy trade book and specialty magazine wholesaler Ingram Book Group from privately held Ingram Industries Inc. for $600 million in cash and stock.

Earnings Movers

Mettler-Toledo International (NYSE: MTD) up $1 1/16 to $22 7/8; Q3 EPS: $0.31 (before charges) vs. $0.10 last year; Estimate: $0.25

Sola International (NYSE: SOL) up $7/8 to $18 15/16; fiscal Q2 EPS: $0.35 vs. $0.46 last year; Estimate: $0.33

Suiza Foods Corp. (NYSE: SZA) up $2 1/2 to $36 7/16; Q3 EPS from continuing operations: $0.76 vs. $0.52 last year; Estimate: $0.75

Tarrant Apparel Group (Nasdaq: TAGS) up $2 3/4 to $22 5/8; Q3 EPS: $0.49 vs. $0.20 last year; Estimate: $0.36

WinStar Communications (Nasdaq: WCII) up $1 1/2 to $31 1/8; Q3 EPS: loss of $2.83 (continuing operations) vs. loss of $1.91 last year; Estimate: loss of $2.94


Sewing machine giant Singer Co. (NYSE: SEW) unraveled $1 1/16 to $4 7/8 after it reported a third quarter loss of $0.13 per share, its fourth straight quarter in the red, well off last year's profit of $0.02 and a single analyst's estimate of a profit of $0.10. The company warned that Q4 results also will be lower than expected and blamed global turmoil, particularly weak Asian demand, for the loss.

Dutch passenger and cargo airline KLM Royal Dutch Airlines (NYSE: KLM) hit some turbulence today, losing $2 13/16 to $28 7/16 after it said its "load factor," a measure of total capacity use, fell to 78.5% in October, down from 81.3% a year ago. One Dutch brokerage downgraded KLM to "underperform" from "market perform" while two others reiterated "hold" and "sell" ratings.

Recoton Corp. (Nasdaq: RCOT), which makes consumer electronic accessories, loudspeakers, and car audio products, buzzed down $3 15/16 to $18 13/16 after it reported Q3 EPS of $0.30, falling behind last year's $0.38 mark and missing the Street's $0.53 mean estimate. The company said increased selling and promotional expenses, new account development costs, and slumping gross margins hurt results.

Two steel companies were hit this morning after downgrades by Morgan Stanley Dean Witter. USX-U.S. Steel (NYSE: X) rusted $1 13/16 to $25 13/16 after being cut to "outperform" from "strong buy," while Nucor Corp. (NYSE: NUE), lowered to "neutral" from "outperform," dropped $1 15/16 to $46 7/16.

American InterContinental University operator EduTrek International (Nasdaq: EDUT) toppled $2 13/16 to $6 3/16 after the continuing education provider said fall enrollment was 5.7% lower than expected and will negatively impact earnings and revenues for the year ending May 31. CS First Boston downgraded EduTrek to "buy" from "strong buy."

Eye care practice management firm Vision Twenty-One (Nasdaq: EYES) blurred for a $2 1/4 loss to $4 7/8 after it reported Q3 EPS of $0.05 (before charges), $0.02 ahead of last year's figure but well off First Call's $0.16 estimate. The company also said it will sell its buying group division, giving a boost to 1999 earnings, and add several new managed care contracts expected to add between $1.5 million to $2 million to next year's gross profits.

Internet hardware and software company Netopia Inc. (Nasdaq: NTPA) slid $15/16 to $5 3/16 after it reported a fiscal Q4 loss from continuing operations of $0.51 per share (including several charges) compared with last year's loss of $0.05.

Enterprise resource planning (ERP) software developer QAD Inc. (Nasdaq: QADI) fell $1 5/8 to $5 after saying it expects "greater than expected" Q3 losses when it reports results Nov. 24. Wall Street currently expects a Q3 loss of $0.08 per share, down from profit of $0.05 per share a year ago. Sales are projected to be 17% lower than last year's figure, which the company attributes to customers delaying purchases because of global economic weakness.

Hagler Bailly (Nasdaq: HBIX) shed $3 5/8 to $19 after the energy, telecommunications, environmental, and transportation industry management consulting company was downgraded to "market perform" from "buy" by Donaldson, Lufkin & Jenrette.

Alternative risk insurance company Meadowbrook Insurance Group (NYSE: MIG) slumped $7/8 to $15 7/8 after Merrill Lynch lowered its rating on the company to "neutral" from "accumulate."


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