A Closer Look at Service, Stewart and the Competition
Service Corporation International (NYSE:SCI) and Stewart Enterprises adhere to very similar business models. They operate funeral homes, cremation facilities and cemeteries throughout the United States, and they sell a wide range of products and services that deceased individuals and bereaved family members might require. By contrast, close competitor StoneMor Partners L.P. (NYSE:STON) focuses more narrowly on the operation and development of cemetery properties. However, Stonemor does provide funeral home services as well.
Service Corporation is the largest of the three firms by a substantial margin. Its market capitalization comes in at just under $3.8 billion and exceeds that of Stewart by a factor of three. Meanwhile, StoneMor Partners L.P. (NYSE:STON) has a smaller footprint that amounts to about $580 million. In 2012, Service Corporation pulled out a profit of $162 million on revenues of just under $2.5 billion. This compares to Stewart’s profit of about $44 million on revenues of $527 million and StoneMor Partners L.P. (NYSE:STON)’s loss of $7 million on revenues of $243 million. Surprisingly, StoneMor Partners L.P. (NYSE:STON) is more expensive than its two competitors. Its price-to-book ratio of 3.3 exceeds Stewart’s by about 25 percent and surpasses Service Corporation’s by about 20 percent.
These firms all use significant amounts of leverage. StoneMor Partners L.P. (NYSE:STON) is in the worst shape: its debt load of nearly $240 million positively dwarfs its cash-on-hand figure of less than $9 million. Service Corporation has about $2 billion in debt to offset cash reserves of around $190 million, and Stewart has obligations of $323 million in debt against a cash hoard of $78 million.
Long-Term Outlook, Synergies and Possible Plays
Given the redundancies inherent in the two companies’ physical footprints and operational structures, it seems clear that this merger will produce significant synergies within a relatively short period of time. The combined company will enjoy better pricing power, less competition, and new opportunities to pursue growth through new-cemetery and new-crematorium construction. According to Service Corporation’s management team, this should produce revenues of at least $3 billion and cost savings of about $60 million.
In sum, this deal offers a rare opportunity for investors to notch fairly quick gains in an otherwise boring sector. In addition to a small arbitrage premium, it provides substantial synergies that could create long-term value. Although some legal hurdles remain, these should be cleared in due time. Investors who take long positions in Stewart and pocket an immediate premium could be handsomely rewarded.
The article This Play Could Be Profitable for Investors originally appeared on Fool.com and is written by Mike Thiessen.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends StoneMor Partners. The Motley Fool owns shares of StoneMor Partners. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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