Canadian Hedge Fund Looks to Shake Up Stewart Enterprises

February 8, 2012
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Death may mark the end to life, but it’s just the beginning of some great profit opportunities.

One of the biggest players in the U.S. funeral services industry, however, has failed to live up to death’s big potential.

It’s the charge of a Toronto-based hedge fund, which is calling out Stewart Enterprises Inc., for mismanagement and substandard stock performance.

“We’ve become increasingly frustrated that they seem to be not very focussed on shareholder value creation,” said Colin Stewart, chief executive of JC Clark Ltd.

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Shareholder activism of this sort is gaining momentum in the United States, but is still a rare phenomenon in Canada, the battle over leadership of Canadian Pacific Railway Ltd. notwithstanding.

It’s even more unusual for a Canadian company to target an American firm, particularly as a shareholder with a stake of just 2.6%.

“Someone might say that’s much too small a stake to have an influence, and certainly that could be the case,” Mr. Stewart (no relation to the company) said.
But someone had to speak up, he explained, citing Stewart’s shortcomings. Revenue growth has fallen short of publicly traded peers over the last seven years, a period in which the company reinvested US$178-million but failed to generate positive EBITDA. That same stretch saw the company’s stock decline by 12%.

“This prolonged misuse of capital has destroyed shareholder value, and clearly demonstrates the ineffectiveness of Stewart’s current and previous management teams,” JC Clark said.

That rationale is “hard to dispute,” according to a note by Bank of America Merrill Lynch.

The note cited the challenges facing the so-called “death care industry”, including relatively low death rates in the United States in recent years. But the analysts said they agree the company’s potential is “more tied to value creating initiatives like the investor is seeking.” Stewart Enterprises did not reply to an interview request.

In speaking out against the company, JC Clark is not necessarily aiming for a change in leadership at Stewart. In fact, high management turnover at the company, which has seen five different people assume the role of CEO over the past seven years, has been part of problem.

Instead, JC Clark says it believes that recent capital expenditures could have been better allocated to dividend increases, share buybacks, or the initiation of a sale process for the entire company.

In 2008, the industry’s biggest competitor, Service Corporation International, offered $11 a share to acquire Stewart, a deal that was scuttled by the economic meltdown.

Stewart’s stock promptly tanked, and has only briefly breached the $8-mark since.

After Monday’s public challenge, Stewart’s equity rose by 5%, evidence of broader support for JC Clark’s cause, Mr. Stewart said. “There’s widespread discontent among larger shareholders.”

While JC Clark’s investment in Stewart might seem paltry, the fund’s expertise in the death-care industry qualifies it to speak up and try to consolidate shareholder concern, Mr. Stewart explained.

The fund was first drawn to the industry more than 10 years ago, when changes to accounting rules mandated recognizing revenue on pre-need sales only when the person in question has actually died.

A contract for funeral services, however, might be signed several years before death. The collective value of the industry in North America fell suddenly from about $25-billion to about $5-billion.

JC Clark didn’t see justification for the industry’s worth to be slashed by around 80%.

Further, a number of antitrust lawsuits in the United States have been resolved in recent years, and death care is poised for a resurgence, Mr. Stewart said. “You’ve got demographics working for you over the long term.”

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CDFuneralNews

CDFuneralNews

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