Stewart Rising From the Grave

Ben Franklin once said, "In this world nothing is certain but death and taxes." Of the two, it's safe to say that death is slightly more certain. This is good news for companies in the underfollowed death care industry. Their futures are tied to the death rate, which means that they could be steady, recession-proof growers for a very long time.

Take Stewart (NASDAQ:STEI), for example. Stewart is one of four large public companies operating in death care. It's ranked third in terms of sales, with Service Corp. (NYSE:SCI) and Alderwoods Group (NASDAQ:AWGI) taking first and second respectively and Carriage (NYSE:CSV) bringing up the rear. Stewart traces its roots all the way back to 1910 and currently operates 234 funeral homes and 145 cemeteries.

Stewart's second-quarter numbers came in yesterday, and at first glance they were uninspiring. Revenue is up 4.2%, but expenses are up almost 8%, and in place of profits there's a loss of $0.04 per share.

Things aren't as bad as they seem, though. Reported expenses look high because of two accounting changes. Adjusting for this, gross margin is up 7%. The accounting changes are important, but they make it seem as though expenses shot up in this particular quarter. More accurate comparisons can be made by applying the change to prior quarters, which means, dare I say it, looking at the pro forma statements included in the earnings release.

The reported loss was caused by a $30 million charge the company took to pay down some of its high-interest debt. This is a good use of capital and will reduce interest expense going forward.

At the current valuation, Stewart has more than enough earnings power and revenue growth to outperform. This does depend, however, on management's continuing focus on shareholder value. Wisely, it is already paying a dividend and buying back stock. The only things left are to start expensing options and avoid overpriced acquisitions.

With the right management in place, the current price might offer a significant margin of safety. This stock looks very similar to Alderwoods Group back in 2003 when our Motley Fool Hidden Gems newsletter recommended it. With companies in the industry so unloved, Stewart, trading at below book value, is worth a look.

Aside from getting two stock picks per month, Motley Fool Hidden Gems members also benefit from Tom's Gardner's CEO interviews. Try Hidden Gems free for a month, and check out Tom's interview with Alderwoods Chairman John Lacey.

Fool contributor Matt Thurmond owns shares of Alderwoods Group. Aside from that, he owns no shares of any other company mentioned in this article.