4 Surprise Stock Market Victims of Diminishing Municipal Finances

Includes: CSV, SCI, STEI, STON
by: NakedValue

While doomsday predictions from headline grabbers like Meredith Whitney may not come true, nobody denies that many U.S. municipalities continue to struggle under the weight of unfavorable trends. Revenues have declined from diminished property, sales and income taxes. In contrast, costs have continued to rise as social safety nets become more necessary and government employee retirement benefits come to the forefront of the political discussion. Still, the victims of such budget constraints are not always obvious.

If developments in Illinois are any indication, the "death care" business could face headwinds as cities and states cut back on spending. In Illinois, the city reserved $13 million to pay for around 12,000 funerals for families that could not afford them. In the 2011 budget, the amount dropped to $1.9 million. While the state could still secure additional funds to meet the likely shortfall, the trend is clear and this could mean less opportunities for death care companies across the country.

This is just a back of the envelope calculation, but considering that Illinois funded 12,000 funerals in 2010 and considering that Illinois is about 4.2% of the U.S. population, a complete cutback across the country of such aid could reduce industry demand by 285,714 funerals.

Here are four publicly traded companies that could be adversely affected by this new trend:

Service Corp International (NYSE:SCI) - This company is the industry's largest public company. In the last 12 months, it generated $2.26 billion in revenues. While there was a slight drop-off in revenues in 2009, revenues rebounded in 2010, proving that the industry is relatively resistant to economic cycles. But the state and citywide cutbacks could challenge this traditional view. In its 2010 SEC 10-K, the company estimates that sales represented 12% of total national industry revenues. If our 285,714 estimate is right, a complete reduction in burial aid could reduce SCI burials by 34,285. Considering the industry's margins, even a small reduction in demand could have outsized consequences on the bottom line.

The company operates 1,254 funeral homes (43 of which are in Illinois) and 372 cemeteries. The stock trades at a trailing P/E of 19.27, a forward P/E of 13.74 and a price/sales of 0.95. In the most recent 12 months, it reported a profit margin of 5.31%.

Carriage Services Inc (NYSE:CSV) - The company has 147 funeral homes in 25 states and 33 cemeteries in 12 states. The stock trades at a trailing P/E of 10.86, a forward P/E of 8.32 and a price/sales of 0.52. It sports a profit margin of 4.82% but has a significant debt load. The company has a market capitalization of $94.77 million but an enterprise value of $321.83 million.

Stewart Enterprises Inc (NASDAQ:STEI) - The Louisiana based company has 218 funeral homes and 141 cemeteries. The stock trades at a trailing P/E of 15.66, a forward P/E of 12.39 and a price/sales of 0.99. Its valuations are slightly above industry average, but so are profit margins of 6.54%.

Stonemore Partners LP (NASDAQ:STON) - The Pennsylvania-based company owns and operates 260 cemeteries and 58 funeral homes. The company has lost money over the last year and it trades at a price/sales of 2.61.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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