Extra: Why Service Corp.'s Warning Could Deal a Death Blow to Stewart Enterprises

Hint: A lower death rate isn't good for the funeral industry.
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Talk about grave timing:Service Corp.'s (SRV) - Get Report warning that fourth-quarter earnings won't meet analysts' estimates precedes by a day or two the scheduled pricing of a stock offering by Stewart Enterprises (STEI) , which had hoped to raise as much as $250 million.

Stewart is the third-largest rollup of funeral homes and cemeteries behind Service Corp., whose stock was off 14 13/16, or 43%, to 19 5/8, and

Loewen Group

(LWN)

, whose stock has been the picture of death since reporting disappointing earnings last year. (Its stock was off 5/8, or 12.5%, at 4 3/8.)

With Loewen and Service Corp. both blowing up, you can't help but wonder whether the concept of rolling up cemeteries and funeral homes is inherently flawed, and whether it's only a matter of time before Stewart -- stock deal or no stock deal -- will be the next to disappoint. (If that deal gets done, it'll be one tombstone that bankers will have earned!)

Especially troubling for Stewart, and potential buyers of its shares, is the primary reason Service Corp. -- the industry leader -- gave for the bad news: Reduced mortality rates in key markets. "Declining death rates pose a challenge for the industry," says Service President William Waltrip. If the death rate's decline doesn't reverse itself, he says earnings for the entire industry this year could be flat with last year's levels.

(Do fewer people die in Stewart's markets?)

What's more, Service Corp. blamed increased operating costs and "overhead expenses associated with necessary investment in newly acquired operations." Weren't instant savings supposed to be the whole point behind these rollups, as embalming and other functions were centralized?

Service Corp. also blamed its fewer-than-expected acquisitions on "higher-than-anticipated acquisition pricing." That suggests rolling up funeral homes, for all these companies, is a dying strategy that will bury investors as the number of takeovers declines. Loewen, in fact, is trying to sell many of its funeral operations.

Where does that leave Stewart? Not in very good shape, according to short-sellers, who had been wondering why Service Corp. took so long to implode. Not only must Stewart deal with a declining death rate, but it's experiencing a decline in high-cost funerals. Asked during a recent roadshow presentation why the average funeral price had dropped to $3,200 from $4,200 over two years, Stewart execs blamed a shift toward cremations.

Short-sellers believe that Stewart, as was the case with Service Corp. and Loewen, is really nothing more than a numbers game that can't be sustained. Stewart, after all, generates minimal cash flow from operations, which means it must regularly raise public money for acquisitions, which are the key to its growth. (Go back and reread what happened to Service Corp. as a result of skyrocketing "acquisition pricing.") If it can't raise the cash, or make acquisitions fast enough, its whole strategy falls apart.

The company has said it expects to generate a 20% gain in sales and earnings, and that it expects to make $250 million worth of acquisitions this year. Any glitch in that plan, Stewart has warned, could hurt earnings. (How much you wanna bet Service Corp. issued a similar warning? It did.)

As with any rollup, Stewart is getting a higher value on Wall Street than Stewart itself is putting on the companies it's acquiring. Since 1996, when Stewart started buying the bulk of its funeral homes, it has paid an average of $1.5 million per home. If Stewart were valued the same way, subtracting $900 million in debt, some shorts believe it would trade at 2 1/2.

"This is a numbers game that works as long as there's a business," says one short-seller, "and the business here is going away."

Stewart's stock was recently off 2 23/32, or 13%, at 18 23/32. The status of the stock offering, which includes shares held by insiders and was expected to be priced tomorrow or later this week, is unknown. An exec of Stewart declined to comment, citing the so-called quiet period ahead of a securities offering.

Pass the shovel, please.

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Herb Greenberg writes daily for TheStreet.com. In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.