Alderwoods Back From the Dead

Yesterday, Motley Fool Hidden Gems selection AlderwoodsGroup (Nasdaq: AWGI  ) reported its first annual profit since rising from the ashes of the bankrupt Loewen Group. The company is the second-largest operator of funeral homes and cemeteries in the U.S. and Canada. Alderwoods' competition includes No. 1 Service Corporation International (NYSE: SRV  ) , Stewart Enterprises (Nasdaq: STEI  ) , and the smaller Carriage Services (NYSE: CSV  ) .

For 2003, Alderwoods reported earnings of $0.27 per share, compared to a 2002 loss of $5.86 per share. Given this $6 change in fortune, Alderwoods' business line brings to mind the Time Warner (NYSE: TWX  ) HBO series Six Feet Under. Alderwoods looked dead and buried, but the management team is injecting new life into the company.

Emerging from bankruptcy in Jan. 2002 with $836 million in debt, the firm had whittled this down to $630 million by the end of 2003. In 2003 alone, Alderwoods reduced the debt by $125 million. Some of this was achieved by the sale of assets in the U.K., but the vast majority of debt reduction came by way of good old-fashioned cash flow from operations. That's right, Alderwoods is a cash-generating machine and this ability will only get better in 2004.

During the second half of 2003, Alderwoods' improving balance sheet enabled management to refinance over $350 million of debt at considerably lower rates. Much of the benefit of the lower interest charges on this debt will not accrue until this year.

There is no doubt in my mind that this reduction will continue, and I expect the debt will be well under $500 million by the end of 2005. If my assertions do not convince you, consider this: The board has given Chairman John Lacey and CEO Paul Houston incentives in the range of $1.2 million to $2.4 million if they can reduce the debt to between $530 million and $435 million by the end of 2005.

Alderwoods has been resurrected from six feet under, and I fully expect Lacey and Houston will continue to improve the balance sheet and earn their maximum bonus. In my opinion, patient investors will also be well rewarded.

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Fool contributor Philip Durell, otherwise known as admiraltroll on the Fool discussion boards, owns shares of Alderwoods.