Morningstar is initiating credit coverage of Stewart Enterprises STEI with an issuer rating of BB. We think a combination of high leverage, negative long-term secular trends, and investment risk makes the firm’s debt a dicey proposition.
Secular trends limit opportunities for growth in the death-care industry. First, medical advances are extending life spans. As a result, the Census Bureau estimates that the number of deaths will increase just 1% annually. Further, cremation has become increasingly popular, with cremation rates rising from 32% in 2000 to 42% today. While death-care companies do generate revenue from cremations, it is much lower than traditional interment. As a result of these factors, we foresee very limited growth for the death-care industry and doubt that Stewart will be able to buck this trend.
While death can be considered one of the two certainties in life, a growing reliance on preneed sales creates top-line volatility for Stewart and generates investment risk. Because of the lack of industry growth, Stewart has increasingly focused on preneed sales to drive revenue. While paying for a funeral at the time of death is unavoidable, paying in advance is highly discretionary. As a result, Stewart has experienced a material falloff in revenue because of the recession. Additionally, proceeds from preneed sales are placed in trusts until the actual funeral services are delivered, giving rise to the risk of investment impairments or insufficient investment yields. With Stewart carrying an investment portfolio of almost $900 million at the end of fiscal 2009, and almost half of that portfolio invested in equities, this risk is not immaterial.
Considering these risks and the poor long-term growth outlook, we think Stewart’s leverage is a cause for some concern. At the end of fiscal 2009, debt/EBITDA stood at 4.2 times.
Source: MorningStar.com
