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Stewart Enterprises, Inc. (STEI), Service Corporation International (SCI): This Acquisition Is A Steal, Buy The Buyer

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Investing in death is one of the most unconventional thoughts in the financial fraternity. In most cases, those who invest in death never get to enjoy the benefits. The beneficiaries do. However, there are a few companies which give investors the rare opportunity to enjoy the benefits of death. One of those companies is Stewart Enterprises, Inc. (NASDAQ:STEI). The company provides funeral and cemetery products and services in the death-care industry. Founded in 1910, Stewart Enterprises is one of the biggest death-care companies in the U.S. The company has operations in nearly half of the 50 states, running 217 funeral homes and 141 cemeteries, as of December 17, 2012.

Stewart Enterprises, Inc. (NASDAQ:STEI)

Service Corporation International (NYSE:SCI) has offered to acquire Stewart for $13.25 per share, in a deal that would see the shareholders of the Jefferson, La.-based death-care company pocket a premium of 36% on top of the stock’s value as of May 28. However, this sale is subject to a challenge in court as the shareholders of Stewart Enterprises have the option of filing a lawsuit against Service Corp. in what could result in a better valuation. This company is on the rise based on its recent performance, and the valuation by the buyer seems somewhat to overlook this fact.

Quarterly results raise questions

In the quarter ended Jan 31, 2013, Stewart Enterprises, Inc. (NASDAQ:STEI) reported an 80% increase in earnings per share. This is an excellent start to fiscal year 2013, according to the company CEO Thomas M. Kitchen.

“Let me begin by noting that it’s an exaggeration to say fiscal year 2013 is off to a superb start. The significant increases in revenue and profitability continuing the positive momentum we generated during fiscal year 2012. This is an indication of good things to come in the remaining three quarters. The company generated $15.5 million or $0.18 per share for the quarter, which is the company’s highest EPS in 10 years. Revenues were up 9%, for a subsequent 27% growth rate in gross profit. This was an improvement of 340 basis points compared to the gross profit margin of the first quarter 2012.”

The company’s funeral business was also up to a great start for the new fiscal year, with an 8.5% increase in revenue resulting in a 14% rise in gross profit. Same-store funeral services were also up 8%, which was a major highlight in the funeral business. Revenue from the cemetery business increased by 9%, and improved the gross profit for the unit 63% from last year. The company is off to a great start with breathtaking growth rates with promises of increased earnings going forward.

Why 80% growth in earnings, compared to just 9% for revenue?

The key to Stewart Enterprises, Inc. (NASDAQ:STEI)’s massive 80% growth in earnings compared to just a 9% rise in profits year over year was improved cost management. According to Kitchen, the company’s improvement is also partly due to its focus on serving employees and customers. This has increased efficiency, helping reduce operational costs.

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