In the 1934 movie classic "Death Takes a Holiday," Frederic March plays Death -- and comes to Earth to learn why people fear him. Instead, he finds love, in the form of Evelyn Venable. The more she comes to know him, the more she loves him.
This just might make a good metaphor for Alderwoods Group (NASDAQ:AWGI), an operator of funeral homes and services. Uncomfortable with their own mortality, people are often averse to investing in the death-care industry. Yet once you get to know this company, you see that not only is it not fearsome, but also it is essential and downright profitable. OK, you might not find Alderwoods lovable, but you need not shy away from investing in it, either.
This company was a classic turnaround situation when it was first recommended last year in Tom Gardner's Hidden Gems small-cap newsletter. It had emerged from bankruptcy in 2002 with a new management team and a commitment to paying down debt that was somewhat south of $1 billion. It is the No. 2 player in funerals behind Service Corp. International (NYSE:SCI), operating 683 funeral homes, 110 cemeteries, and 61 combination funeral home/cemetery outfits. While never a growth stock, Alderwoods has appreciated by more than 58% since its Hidden Gem recommendation last year. What does that mean for the future?
There are two types of funeral sales, pre-need and at-need. A pre-need sale is when you purchase funeral services prior to actually using them, while an at-need sale occurs at the time of death. For its third quarter, Alderwoods posted a 1.3% decline in total revenues and saw a 4% drop in funerals performed but reported a nearly 3% increase in pre-need sales. Service Corp., for the same period, reported a similar drop in revenues and funerals performed but also witnessed a 1% drop in pre-need sales.
Of course, neither Alderwoods or Service Corp., nor competitors Stewart Enterprises (NASDAQ:STEI) and tiny Carriage Services (NYSE:CSV), have any control over death rates, which rise and fall over time. Over the past few years they have been on the decline -- in 2003 the U.S. death rate was 8.3 people per thousand, down from 8.8 in 1995. These companies are all subject to the same industry factors, and with the country's demographics pushing the death rate to more than nine people per thousand by 2020, being able to sell your services before they're needed will be key to future growth. As will cleaning up your balance sheet. Alderwoods has cut its debt by nearly a third over the past year and continues to lighten its debt load aggressively, making it a more lean operation.
An investment in Alderwoods is not like one in your typical growth stock. Someone buying Taser (NASDAQ:TASR) or Travelzoo (NASDAQ:TZOO) is likely to see her shares rocket to a double overnight, if not sooner. Alderwoods, instead, is a play on becoming a streamlined, efficient operator over time.
Even though shares have grown by half since it first appeared in Hidden Gems, Alderwoods still represents a decent value (at $11 a share) for a company with the potential to double in price over the next three to five years. A steady performer, it's one with which you can easily rest -- though, let's hope it's not the eternal kind for a while yet.
Want to see what other sleepy values Tom Gardner has found? Try Hidden Gems free for 30 days, and get the Stocks 2005 annual stock guide as a bonus!
Fool contributor Rich Duprey is gearing up for a good night's rest on a Select Comfort mattress. He does not own any of the stocks mentioned in this article.
