Funeral Roll-Ups Face A Slow, Painful Death We all have to die, right? So why hasn't the funeral-service industry performed any better for investors?
By David Whitford

(FORTUNE Magazine) – It seemed like a smart strategy at the time. Buy up all the funeral homes you can get your hands on (the deeper the roots in a local community, the better). Keep the signs with the old family names. Reduce inefficiencies. Introduce economies of scale. Raise prices like there's no tomorrow. And position yourself perfectly for spectacular unit growth in the not too distant future when, inevitably, the baby-boomers start dying off in droves.

Kind of creepy, but what a concept! Your classic roll-up strategy with a morbid twist, just the thing to pique investor interest. Wall Street fell in love with all four companies that did it: Service Corp. International, Loewen Group, Stewart Enterprises, and Carriage Services. For much of the '90s those stocks averaged 30% annual returns, and Peter Lynch himself once called Service Corp.--the pioneer and still by far the biggest player--one of his "favorite all-time picks." In July 1998 it hit $47.

Today you can buy Service Corp. (if you dare) for less than $3 a share. Same with Stewart and Carriage; they both peaked near $30. Loewen, meanwhile, is in Chapter 11. We've come to expect such shocks from dot-coms and other make-believe-earnings generators, but this was supposed to be a sure thing. Whatever happened to death and taxes? Disappointing volume, believe it or not. It turns out the national death rate stabilized two decades ago at just under nine people per 1,000; in recent years, it's even down slightly. "Which is good news for everyone except these guys," deadpans analyst John Ransom of Raymond James & Associates.

Another problem: declining revenues. About 25% of Americans who die these days choose cremation (which costs less than $2,000) over burial (which averages more than $5,000), and in some markets the cremation rate has gotten as high as 70%. Then there's increased price sensitivity. Not happy with the casket prices you're seeing? Under a new federal law, you have the right to shop around for a better deal and buy a casket at someplace other than the local funeral home handling your great-aunt's arrangements. That's given rise to outfits like, which, in addition to a full line of discount caskets, also offers "unbeatable prices on cemetery markers, flowers, and cremation urns."

All of which pose business challenges the consolidators might be up to if they weren't buried under so much debt. During the height of the roll-up frenzy, when competition for properties was at its peak and prices got out of hand, everybody was doing the same stupid dance: borrowing heavily to make acquisitions, in the hope they could subsequently boost earnings, lift the stock, raise cheap capital, and pay down the debt--what Carriage CEO Melvin Payne describes as a "build-it-up, pay-it-down, build-it-up, pay-it-down type of deal." But if you build it way up and then the public equity markets cut you off, you never get to pay it down. Judgment day arrived on Jan. 26, 1999, when Service Corp. lopped off 45% of its fourth-quarter earnings estimate and the stock plummeted, dragging the whole death sector down with it.

So now what? Service Corp. CEO Jerald Pullin, who has a tight smile and a firm handshake, is full of ambitious plans to stimulate internal growth with new services like grief counseling, legal advice, and affinity-group marketing. In January the company announced it would sell off hundreds of funeral homes and cemeteries, which sounds like a good idea, except that everybody else is selling now and it's not exactly clear who's buying. Meanwhile, Pullin says, he's working on a three-point plan for reviving Service Corp.: paying down its debt--$3.3 billion as of Sept. 30, 2000--increasing cash flow, and cutting expenses (not the corporate jets, though; the company still has two on lease).

So is there a value play somewhere in this mess? Not according to any of the analysts FORTUNE talked to. Ransom, for one, thinks Service Corp. will probably survive--he recently bought some of the company's bonds for his own portfolio--but he has no great hopes for the stock. "I've never been able to figure out what drives equities for companies that don't have any growth," he says.

Live and learn.