Is the Death Rate 'Irrelevant' to the Funeral Industry?

New twists to an old story.
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Can this

Stewart Enterprises

(STEI)

story possibly get any better? To recap from earlier columns: Just as Stewart was about to do a stock offering, its main rival,

Service Corp.

(SRV) - Get Report

, disclosed that its earnings would miss Wall Street estimates. The news came a half year after similar news sucked the life out of another rival,

Loewen Group

(LWN)

. Service blamed its troubles, in part, on a falling death rate. Its stock reacted by plunging 44%. I had called Stewart shortly after its announcement, but it declined to comment, hiding behind the shield of the "quiet period" associated with its offering. "Besides," a company spokesman told, "even if we could talk, we have a policy of not commenting on anything our competitors say."

Lo and behold, within hours, Stewart held a conference call with investors (under the guise as having been planned as part of its offering road show) to respond to Service Corp.'s comments -- especially the part about the death rate. Specifically, CEO Joseph Henican said, "The death rate is something that is irrelevant to us." You can only imagine what anybody listening to this call must've been thinking: Here's a guy who runs a bunch of funeral homes, who relies on the death rate -- whose chief competitor blamed its troubles on the falling death rate -- saying the death rate doesn't matter.

Henican went through an elaborate explanation about the death rate being the number of people who die vs. the total population, and how "we are not burying at Stewart Enterprises a percentage of the population. What is important to us in the business is the number of deaths that occur." That number, he says, has been inching ahead at 1% per year. He then reiterated: "The percentage of those Americans who have died is not significant to us. Furthermore, with regard to the cemetery side, which in the U.S. represents 50% of our revenues, the number of deaths that occur is not relevant."

Okay, so here's a guy who runs a bunch of cemeteries, whose chief rival just told us a declining death rate matters, once again telling us that the death rate doesn't matter. How can that possibly be? Well, according to Henican, 70% of the company's cemetery revenues are generated by sales of presold funerals, which is why "death does not have to occur for us to recognize revenue. What's important is that the number of target people in our market increases."

That begs the question: Just what business is Stewart in? Just as

Boston Chicken

was a finance company parading as a poultry palace, one short-seller familiar with both companies believes Stewart is really the equivalent of an insurance company masquerading as an embalming emporium. What's wrong with that? "It's a policy that you sell today for a set price based on your assumption of what your underlying costs will be," this short-seller says. "With the competition as stiff as it is, so to speak, you have a lot of assumptions that might have to be compromised." In which case the financial statements of Stewart and its competitors could, at some point, face scrutiny.

Meanwhile, the preneed funds are invested in stocks and a variety of typically low-yielding fixed-income securities. Stewart boasts returns exceeding 30% on its investments. That's well above what high-quality corporate bonds earn, suggesting that any downturn in the bull market for stocks might not be good.

Other details from the conference call:

The company considers cremation "an opportunity."

If the deal is done at a price lower than the company had been expecting, it anticipated there could be "a couple of pennies" of dilution to its earnings.

Was it just a coincidence that Stewart's two biggest rivals blew up? Henican, saying that Stewart's business opportunities are better than they've ever been as a public company, called it an "odd coincidence." The crux of Stewart's argument was that the troubles at Loewen and Service Corp. were company-specific. To which one short-seller said, "For Stewart to say they're different is ludicrous."

Bottom line: It's almost

always

a big red flag when a company in an industry claims it's immune from generic industrywide conditions.

Tales from the Crypt

Reader Sheila Harrison, referring to a comment in Tuesday's column, writes: "If the Street was waiting for Service Corp. to implode, why was the First Call rating 'strong buy'?" Because brokerage firm analysts are often the last to know. Heck, pity how

Equity Corp.

must feel. It sold itself to Service Corp. in a stock swap in a deal that closed Jan. 19 which called for Equity to swap each share for 0.71 of a share of Service Corp. (A classic warning about what can happen when overpriced stock is used as currency!)

Reader Jack Sweeny writes of Service Corp.'s president's comment, in Tuesday's column, that "declining death rates pose a challenge for the industry": "I suppose the Service Corp. president's next comment could have been, 'Don't just sit there, get out and kill someone.' As Michael Foot pointed out in 1996, the mortuary business in North America will not be a strong growth industry over the next 20 years because relatively fewer people were born in the 1920's and 30's. His book, 'Boom Bust & Echo,' convinced me to sell my position in Loewen Group that same year, while I was still in the black. It's nice to see, per your article, that Foot's prediction continues to be an accurate one. CHEERS!"

Easy for you to say; you're still alive!

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or 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.