FOOL PLATE SPECIAL
An Investment Opinion
by Warren Gump

Is Stewart Bucking Industry Trend?

Funeral services operator Stewart Enterprises (Nasdaq: STEI) released another positive earnings report, with a year-over-year earnings per share increase of 16%. Despite matching earnings estimated, Stewart's stock fell $5/8 to $18 3/8 in morning trading. It's interesting to see that the nation's third largest death care provider seems to be enjoying continued operating success while competitors are struggling. The world's largest company in the field, Service Corp. Intl. (NYSE: SRV), shocked investors in January when it warned that earnings would fall way below expectations because of "lower death rates;" its stock plunged over 40% on the news. Loewen Group (NYSE: LWN), the nation's second largest death care firm, is now mired in Chapter 11 bankruptcy proceedings because of poor operations and excessive debt.

Stewart has certainly benefited from its competitors problems. One of the primary reasons these companies have been growing over the past decade is a massive acquisitions spree. Most funeral homes and cemeteries were founded as family businesses years ago. As the enterprise passes down from generation to generation, interest among family members sometimes wanes. One easy way to extricate a family out of the business is to sell. Firms like Service Corp., Loewen, and Stewart Enterprises have been voracious acquirers. To fund these acquisitions, the companies issued stock and paid cash. With Service Corp. and Loewen's stock beaten down, they have slowed or stopped their acquisition efforts.

Stewart Enterprises, on the other hand, is moving full steam ahead while its competitors take an acquisition hiatus. During the second quarter, the company took on 62 businesses for $111.3 million, the most in its history. In addition to using its stock, which has fallen less than others in the industry, Stewart raised over $200 million in January through a secondary stock offering. The company is taking advantage of being one of the few buyers in the market.

Although Stewart's earnings appear strong, the company's cash flow statement isn't as pretty a picture. Last year, the company only generated operating cash flow of $18 million on continuing net income of $92 million. The discrepancy is caused by increases in receivables and deferred charges. Similarly, operating cash flow in the two years prior to 1998 combined for a negative $4 million despite strong reported earnings. To be fair, receivables and other working capital items normally increase as businesses grow. Nonetheless, Stewart's businesses are not generating much cash. To put this in comparison with another company in the industry, Service Corp. has generated operating cash flow of $838 million on net income of $941 million over the past three years.

While Stewart's earnings growth appears much more impressive than Service Corp.'s, Stewart isn't generating much operating cash flow. If I were to choose among the two, my money would go to the company producing the much stronger cash flow.

UPS

Communications chipsets supplier Conexant Systems (Nasdaq: CNXT) connected for a $4 3/16 gain to $49 1/2 after saying strong demand for all of its business platforms, especially its network access products, will result in fiscal Q3 earnings that will "significantly exceed" the current First Call mean estimate of $0.11 per share.

Scientific equipment supplier VWR Scientific (Nasdaq: VWRX) jumped $8 9/16 to $36 1/2 after saying German pharmaceutical and specialty chemical company Merck KGaA (no relation to the U.S. drug giant of the same name) has agreed to acquire the 50.1% stake in the company it does not already own at a price of $37 per share in cash.

Television and radio station operator Sinclair Broadcast Group (Nasdaq: SBGI) rose $15/16 to $16 9/16 after saying yesterday that its is considering options for its radio operations, including an outright sale of the business or a possible initial public offering of a subsidiary holding only the radio assets.

Online credit card issuer NextCard (Nasdaq: NXCD) moved up $7 9/16 to $44 1/16 after Donaldson, Lufkin & Jenrette and Thomas Weisel started coverage of the firm with "buy" ratings and U.S. Bancorp Piper Jaffray gave an initial opinion of "strong buy." All three investment banks were underwriters of NextCard's initial public offering last month.

Static random access memory (SRAM) chips and programmable logic devices (PLD) maker Cypress Semiconductor (NYSE: CY) grew $1 1/8 to $13 after Prudential Securities raised its rating on the firm to "strong buy" from "accumulate" with a 12-month price target of $18 per share.

Online healthcare information company drkoop.com Inc. (Nasdaq: KOOP) added another $2 11/16 to $19 1/8 after rising 83% yesterday in its first day of trading following its initial public offering of 9.4 million shares at a price of $9 per share.

Fiber optic network operator Qwest Communications (Nasdaq: QWST) was boosted $2 13/16 to $46 1/8 this morning after The Wall Street Journal cited a federal filing by Baby Bell BellSouth Corp. (NYSE: BLS) that suggested the company is interested in acquiring a controlling interest in or possibly even merging with Qwest. Last month, BellSouth acquired a 10% stake in Qwest for $3.5 billion.

E-mail direct marketing company MessageMedia (Nasdaq: MESG) picked up $1 15/16 to $11 5/8 after agreeing to acquire privately held e-mail marketing software developer Revnet Systems for about $46 million in stock.

Specialty auto auctions operator Insurance Auto Auctions (Nasdaq: IAAI) salvaged a $1 9/16 gain to $14 5/8 after saying recent marketing and profitability improvement efforts are increasing unit volume and margins, leading the company to expect that its Q2 earnings will be 35% to 40% above the $0.26 per share the company said analysts had been expecting.

DOWNS

Diversified defense contractor Lockheed Martin Corp. (NYSE: LMT) was shot down $5 3/16 to $35 1/4 after readjusting its earnings guidance and forecasting fiscal 1999 earnings of at least $1.50 per share and fiscal 2000 earnings of at least $2.15 per share. Those figures are well below the 1999 mean estimate of $3.10 and the 2000 estimate of $3.39, according to analyst research firm First Call. All told, the 1999 results will be less than half of last year's performance. For more on the disappointment, head on back to this morning's Breakfast With the Fool

Information technology services company Condor Technology Solutions (Nasdaq: CNDR) descended $4 27/32, or 48%, to $5 1/32 on news that it expects Q2 losses of between $0.03 and $0.05 per share on revenues of $51 million to $54 million. Wall Street was looking for EPS of $0.24 to $0.25 and revenues of $58 million to $60 million. Results are expected to be announced by July 27. Condor incurred "substantial expenses" in anticipation of a contract award that was subsequently suspended.

Contact lens maker Ocular Sciences (Nasdaq: OCLR) blurred $2 3/4 to $16 7/8 as CEO Wick Goodspeed said, "We currently expect that earnings per share will be in the range of analysts' estimates for the second quarter on solid, but lower than originally expected, revenue." Eight analysts surveyed by IBES had a $0.40 per share consensus and a range of $0.38 to $0.42.

Television broadcaster Young Broadcasting (Nasdaq: YBTVA) tuned out $3 1/4 to $38 5/8 this morning after it said it expects Q2 broadcast cash flow to be 10% below last year's levels because of sagging advertising sales. The company blamed some of the ad sales softness on a difficult year-over-year comparison driven by an absence of political advertising.

Voice, video, and data hardware and software systems provider ADC Telecommunications (Nasdaq: ADCT) hung up $5/16 to $47 11/16 this morning. CFO Bob Switz reportedly told reporters at a conference yesterday that he backs Wall Street's consensus EPS projections of $1.32 for 1999 and $1.63 for 2000. The company said last night it agreed to buy Pathway, which makes asynchronous transfer mode access products for high-speed voice, video, and data communications. No financial terms were reported.

E-business consultant Scient Corp. (Nasdaq: SCNT) put down $2 1/8 to $40 1/8 as Morgan Stanley Dean Witter started coverage of the company with a "neutral" rating. Morgan Stanley was the lead underwriter on Scient's IPO last month.

Northwest Airlines Corp. (Nasdaq: NWAC) was lowered $1 1/16 to $30 after Warburg Dillon Read cut its rating on the stock to "reduce" from "hold." This weekend, the company's flight attendants' union voted overwhelmingly to give their leaders the option to strike.

Information management software company BackWeb (Nasdaq: BWEB) gave back $3 1/16 to $16 5/8 after jumping ahead $7 11/16 yesterday in the company's first day of public trading. The company sold 5.5 million shares for $12 each.

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Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool Editing Brian Bauer (TMF Hoops), another Fool Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last