Death and Taxes: Are These Two Certainties A Good Place To Invest?

• On 3:09 pm EDT, Tuesday September 15, 2009

67 WALL STREET, New York - September 15, 2009 - The Wall Street Transcript has just published its Funeral Services and Tax Preparation Report offering a timely review of the sector to serious investors and industry executives. This 57 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Estate Tax Planning -- Death and Taxes -- Tax Accounting Services -- IRS Audit Targets -- Cremation Market - Funeral Service Providers - Increasing Competition - Imported Chinese Caskets - Traditional Funeral Service - Membership Retention Rate - Funeral Trends - Potential of the Publicly Traded Companies - Public Funerals - Pet Funerals

Companies include: Intuit (INTU); Jackson Hewitt (JTX); H and R Block, Service (HRB); Gilman Ciocia (GTAX); Corporation International (SCI); Carriage Services (CSV); Keystone North America (KNA:TSX); Stewart Enterprises (STEI); Hillenbrand (HI); StoneMor (STON); Matthews International Corp. (MATW); Aurora Casket Company.

In the following brief excerpt from just one of the 10 interviews in the 57 page report, an industry expert discusses the outlook for the sector and for investors.

Robert M. "Bob" Fells, Esq. has served as General Counsel of the International Cemetery, Cremation and Funeral Association since 1983 and worked on behalf of the cemetery and funeral services industry since 1975. In 2000, he was appointed as the association's External COO. In addition to these duties, Mr. Fells serves as President and General Counsel of the ICCFA Service Bureau, Inc., a for-profit subsidiary of the association that administers the Credit Exchange Plan. Mr. Fells serves as Executive Director of the recently formed ICCFA Educational Foundation, a tax-exempt charitable organization. He is a graduate of Iona College and holds a Juris Doctor degree from George Mason University School of Law. He is a licensed attorney in Virginia and the U.S. Supreme Court Bar.

TWST: How many funeral homes and cemeteries are there in the United States?

Mr. Fells: According to statistics, there are about 21,000 funeral homes in the United States. There are about 22,000 cemeteries according to one directory, but we know that's understated. That statistic only includes cemeteries with a phone number and address, and we know there are many other cemeteries that have no direct contacts or are no longer operational. Most of the time when we talk about cemeteries, we're talking about ongoing business operations.Most cemeteries in the United States are not-for-profit. There are probably about 7,500 to 10,000 cemeteries that are for-profit from an investment perspective, such as those that are owned by publicly traded companies. Curiously enough, there are about five or six states that prohibit for-profit cemeteries; in those states, a cemetery must be a non-profit or they're not allowed. Those states are mainly up in the Northeast. There's really no good reason why that should be non-profit; this restriction handicaps cemeteries' abilities to function fully. The only advantage of being a non-profit is that after you pay reasonable expenses, including reasonable salaries, the proceeds are placed into the reserves of the cemetery. I'd say most for-profits do the same thing, especially to build up their maintenance trust funds.There is also an expectation that if a cemetery is non-profit, prices will be lower, but there is actually nothing that requires a non-profit to charge lower prices. They can charge whatever prices they want. This issue is an antiquated protectionist viewpoint that needs to be modernized. Once in a while, someone introduces a bill in one of these states to allow for-profit cemeteries, but we usually hear that the restriction is for "consumer protection." No one ever explains quite how consumers are being protected by prohibiting for-profit cemeteries from existing. On the funeral home side, the typical funeral home will be a for-profit business, including those that are independently owned and those owned by publicly traded companies. Many are incorporated or might be a subchapter S corporation; they could be a partnership or sole proprietorship as well. It's estimated that about 85% of the funeral industry (including crematories) is composed of small businesses. Many of those are family-owned and have been that way for some generations. About 15% are what is called "corporate-owned" - that is, they are owned by either publicly traded companies or smaller companies that perhaps are not publicly traded. The largest of the publicly traded companies is Service Corporation International (SCI) out of Houston. After that, there is Stewart Enterprises (STEI) in New Orleans, Carriage Services (CSV) in Houston, and StoneMor (STON) near Philadelphia. There are also a number of smaller corporate entities that have been formed and that are growing. These companies are acquiring very selective funeral homes and cemeteries. Who's to say in the future that they may not become publicly traded? It's certainly not beyond the realm of possibility.

TWST: In the 1990s, there was a lot of acquisition activity within death care. As you said, right now it's just more selective activity?

Mr. Fells: In the mid- and late 1990s, a number of things came together at once. A number of cemetery and funeral-home owners, oftentimes those who operated family-owned businesses, realized, number one, their children were not interested in carrying on the business as such. Secondly, there was a rise of the public companies. Back then it was SCI, Loewen, which later became Alderwoods Group, and then SCI acquired Alderwoods a few years ago; and there was Stewart Enterprises. All of a sudden, there was a market to actually sell your cemetery or funeral home, and that was a prospect many people hadn't really thought about. That evolved from the 1980s into the 1990s. So an entire generation of funeral-home owners and cemeterians who were looking toward retiring and who were not going to be passing the business on to the family because there was no interest found that not only did they want to sell, but there actually was a market to sell. There were many people who became independently wealthy because of the sale of their businesses. It was a win-win situation from a business marketing point of view. There was also competition between some of these public companies to get the good properties before the other guy got them. Because of this, there was a lot of rapid acquisition; after the dust settled, in many cases, the public companies asked themselves, "Why did we buy that?" A certain amount of buyers' remorse took over so that by the end of the 1990s and at beginning of this decade, there were a number of divestitures that took place. In some cases, it was just a thinning out - some properties didn't work out the way they thought they would; in other cases, they just decided they wanted to define their core goals and core business, and certain properties didn't fit in with those goals. In some cases the original owners actually bought back the business, so they got it both ways. They made money selling, and they bought it back for less and continued on. It was a very strange time. I remember reading quotes from Wall Street analysts in newspapers and other publications, and they were saying to buy these stocks because everybody dies, and that was rather simplistic. You could say, "Invest in a grocery store because everybody has to eat food," or "Invest in a clothing business because everybody has to wear clothes.' We know clothing businesses fail and grocery businesses fail. I think the expectations are a little more realistic today. The companies are being a lot more careful. There are still acquisitions going on, but they are more selective about what they're doing. I don't think they're offering the prices they did before. Those days are gone, but there are still a lot of quality properties out there, and if the current owners decide either because they're retiring or whatever that they want to sell, they're doing that.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 57 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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