Investors, your hearse awaits -- in a good way. Once the weekend's been laid to rest, funeral-services company Stewart Enterprises (NASDAQ:STEI) will report Q2 2006 earnings results on Monday.

What analysts say:

  • Buy, sell, or waffle? Five analysts follow Stewart, with two rating it a buy, two a hold, and one a sell.
  • Revenues. The funeral operator's revenues are believed to have shrunk 1% in comparison to last year.
  • Earnings. And profits are expected to drop 27% to $0.11 per share.

What management says:
In the company's March earnings release, CEO Kenneth Budde termed Stewart's first-quarter 2006 performance "solid," citing improved cash flow, gross profits, and earnings. But that statement seems a bit misleading to me. For one thing, although it's true that gross profit improved in this single quarter, a longer-term perspective shows that revenues are still declining. As for improved earnings, well, they could hardly have gotten worse. Year over year, Stewart took a massive $153 million charge to earnings in the previous year's Q1; sequentially, Q4 2005's charge was smaller, at just $12 million. But either way, improving on the earnings from quarters where large charges were recorded seems less a reason to exult, and more a foregone conclusion.

What management does:
Stewart has fared poorly lately. Rolling gross, operating, and net margins are all down over the last 18 months. Part of the problem rests with the firm's revenue picture (sales are down 6% in the past six months, for example), but it doesn't help that the cost of goods sold hasn't dropped at all in that period, or that selling, general, and administrative costs rose while sales dropped.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

23.3

21.7

22.5

22.0

20.7

20.9

Op.

19.8

18.0

18.5

17.6

16.7

16.5

Net

7.4

(24.8)

(26.6)

(26.4)

(29.0)

2.1
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Through no effort (or fault) of its own, Stewart is set to become the second-largest funeral-services provider in the U.S. within the next few months. It was No. 3, until industry leader Service Corp International (NYSE:SCI) tendered $20 per share to acquire No. 2 competitor Alderwoods (NASDAQ:AWGI) -- an offer accepted by Alderwoods' shareholders last month. That's won't do Stewart's business any good, now that it's facing off against a single rival five times its size ($2.5 billion in annual revenue versus $500 million).

Stewart's primary problem doesn't seem to be a failure to control expenses, but simply a lack of revenue growth. In Monday's news, investors will want to hear Stewart's plans to get its revenues growing again. The sooner the company does so, the better. Its competitive environment won't make this job get any easier after Alderwoods and Service Corp combine forces.

Competitors:

  • Carriage Services (NYSE:CSV)
  • Stonemor Partners (NASDAQ:STON)

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Fool contributor Rich Smith owns shares of Alderwoods, which is also a recommendation of Motley Fool Hidden Gems . Check out the Fool's strict disclosure policy.