Can good IR outweigh ‘bad demographics?’ Service Corporation International (SCI) provides an ambiguous case. For years, the Houston-headquartered funeral services chain had grown steadily in the US and all five continents. It seemed as assured in its revenue as the IRS. At worst its customers could postpone their arrival at the cemetery gates, but they couldn’t stave it off forever. And we do not go cheaply into that good night. American funerals average almost $5,000 before value-added features like the cemetery are considered.
SCI’s seemingly inexorable expansion was based on acquiring local funeral homes, which keep their hometown-feel storefronts while concentrating services and facilities in clusters to bring economies of scale to processes like embalming and providing hearses.It also gained heavy price leverage with suppliers of essential equipment like caskets.
Of course, this is an industry prone to euphemism – a recent Wall Street Transcript roundtable was titled Post-Life Services. Even so, SCI was a lively stock, with many institutions attracted by a steady income stream combined with opportunities for shrinking costs and increasing mark-ups with each acquisition. About 70 percent of US funeral homes are still family owned, giving great expectations for continuing expansion, not to mention operations in the rest of the world.
And then the death knell tolled for booming stock prices. This January 26 SCI issued an earnings warning that Q4 1998 EPS would be $0.22-24 compared with First Call consensus estimates of $0.42 and $0.36 for Q4 1997. Even though the full year’s EPS of $1.31 was the same as the previous year, disappointed investors reacted as if SCI’s customers had come back to life. They ran – some of them to their lawyers.
The share price plummeted. From a peak of $47 it descended to $13 as management discovered it had a lot of momentum players, and as many other institutions dropped the stock when they saw which way it was heading. SCI president William Heiligbrot resigned shortly afterwards and the company announced a series of cost-cutting measures.
Struck by lawsuits
Needless to say, the hearse-chasing attorneys were on the case immediately, not least because SCI had recently acquired Equity Corporation in an equity swap deal. Over 20 class actions were launched within weeks, indeed struck the day of the earnings warning itself. Even so most analysts discount any long-term effect on the stock from litigation. However, it does not make investor relations any easier.
One factor in the equation was what analysts called ‘bad demographics’ and the company termed ‘weak death rates’ last year. Industry insiders blamed a mild summer and winter. Since winter usually provides the death-care industry the equivalent of Christmas shopping for retailers, this was an especially hard blow.
In IR terms, the question is whether a more nuanced introduction of the earnings decline would have mitigated the stark drop. For example, analysts complained that the conference call on earnings was a bare announcement and that SCI management did not provide enough details, nor did they allow questions. ‘Everybody said they shouldn’t even have bothered,’ one analyst recalls.
Analysts and investors, even as they express their displeasure at the lack of information at the January announcement, are at best agnostic about whether more details would have ameliorated the impact on the stock. ‘They could probably have guided estimates down this year; the stock would still have come down, but probably not this much,’ one analyst suggests. ‘The shock was that a business assumed to have slow steady growth should have a miss of such magnitude when there was no inkling that anything was amiss. People were just shocked and a significant number of institutions just dumped it.’ She adds, reassuringly for stockholders if not clients, ‘I think it’ll take time to implement the cost-cutting strategies and programs they’ve mapped – but in the longer term their customers will die.’
Long row to hoe
‘SCI has come a long way in its IR,’ the same analyst concedes. ‘It used to say nothing to the Street, but if you look at the press releases there’s lots of information. With the conference call and release of the last quarter’s earnings it really came back strong in terms of explaining what happened with voluminous information. But by then the damage had been done.’
Jordan Horoschak of Standard & Poor’s admits SCI faced a real challenge. ‘I don’t think if they’d really cautioned us about an earnings drop-off instead of throwing it in our laps, that it would have staved off the devaluation. The death rate had been declining for a year, and they had been doing everything they could to hold their breath until it picked up again. Instead we had a very mild winter. They were just trying to get through this difficult period, staving off all these problems, and it just crumbled. The market punished Service Corp so much because, if you look over 20 years, the stock is straight up, always exceeded expectations, increasing margins. It was the darling of Wall Street. Then after all that consistency, boom! It can be pretty brutal.’
Phil Pauzé the founder of the Texas-based Tombstone Index fund representing the death-care sector, says SCI made up over 50 percent of the fund, and that did not change as the stock fell. ‘The rest of the industry pretty much followed. However, Pauzé reports renewed interest as value investors saw a bargain basement chance to capitalize on the morbidity boom that should soon follow the baby boom. He says that SCI’s earnings announcement ‘was a surprise, and it was disappointing, and the market is going to react negatively to that. I don’t know what they could have done about it, apart from not having disappointing news.’ He adds, ‘My personal opinion is that it is a bargain – I spoke to one investor this morning who was going to double his position in the Tombstone fund because he saw it as a great opportunity.’
From SCI’s point of view, it gave a timely warning of the earnings upset, as details were available, thus fulfilling legal obligations. SCI company attorney Jim Shelger confesses, ‘We were disappointed in the market’s reaction to the fourth quarter. It’s a very tense situation for a company. We’re trying to be frank and forthright with those who communicate with us, but in 60 days we got over 20 suits – and one was filed the same day as our announcement. We’re not really trying to run our company around lawyers, we’re trying to run it on behalf of the shareholders so all of this is something of a distraction.’
Taking aim
In terms of IR, he adds, ‘We’re trying diligently to avoid communicating information that’s not up-to-date and accurate. We want to get it right when we communicate – not ready, shoot, aim. And the company has taken steps to address the circumstances within our control to a level that’s acceptable to the investment community.’
Todd Matherne, solo IRO during the crisis, is still relatively tight-lipped, but it is clear that the company has revised its IR strategy to cope with its changed situation. SCI’s next move is a roadshow around major cities to explain its position to the investment community.
Another initiative was to enhance the IR department, bringing in Debbie Fisher and Eric Tanzberger from other departments as IR directors to cope with the drastically changed investor base and what Matherne calls ‘a significant level of interest and increase in call volume, particularly from new value investors and retail investors.’ He describes the new recruits as having a strong financial background and a solid understanding of the business, with previous experience in acquisitions, operations and financial reporting groups.
Previously the stock was strongly held by institutions including, clearly, a critical mass of momentum players. They all bailed out; and the new investors are retail, long-term, value players who see a bargain in the low-priced stock and are prepared to wait for the implosion of the baby boom to collect on their investment. ‘Targeting is an area of strong interest and opportunity for SCI, considering the new groups of investors that are being introduced to the company,’ Matherne adds.
The lesson is not that death-care is a particularly scary industry. On the contrary, the numbers and prospects, even after the warnings, still look good by any financial measure. Service Corp already had a good reputation for investor relations, and the consensus seems to be that any negative shock was going to crash the stock whatever the company did. It seems likely, that from a new, low base, it has less to fear from future surprises because the make-up of the shareholder base has changed. The new investors – sober retail and value players – may well be the envy of other investor relations officers if the Dow dives. Indeed, if it were not for all those offices with air-conditioning and sealed windows, the company might have a contra-cyclical boom on its hands direct from the ledges of Wall Street.
