<<Service Corp: The funeral industry has really taken a hit because of lower death rates...Like these folks are now immortal or something.
Anyway, Jim you mentioned concerns about financials..possible accounting fraud. Could you expand and update on what you're seeing..because this bunch is lookin pretty appealing at these prices. Gabelli just filed a 13-d indicating 5+% stake in LWN...a significant contrarian play considering the vast majority of news announcements in the past month are class-action shareholder lawsuits.>>
The fact that Gabelli is buying Loewen and not Service Corp. should speak volumes.
I didn't respond to this immediately because I had nothing to add to my previous statement. I remain concerned about the financials, meaning that I have a hunch that you don't want to use historical earnings to value this stock. I generally look at cash flow statements, not income statements, and the cash flow statement and the balance sheet paint a very different picture than the income statement. Lets just say this. When I see a company with a 12% return on equity being hyped as a 20% grower, I am very suspicious. If this business were the gold mine that Wall Street thinks (thought?) it is, ROE would be a lot higher than 12%.
The resignation of the President of the company today tells me I was onto something. The conference call yesterday also tells me I'm onto something. They completely failed to explain how they could have missed such a drastic change in the death rate. This should be an actuarial business. If there was such a sudden change in the death rate, why aren't life insurance companies blowing out their quarters? Why aren't Service Corp.'s competitors posting similar numbers? There is another shoe waiting to drop here, and I would be very wary of buying this company before it does. I was instantly suspicious, without knowing a thing about the business, when I read the initial press release. It just didn't make sense to me.
When you're dealing with what you suspect are misleading financials, you have to shift to a different level of analysis. First, forget the historical earnings, assume they are going to be restated. Value the company off the cash flow statement, which would take outright fraud to mislead on. Second, pick a nonfinancial event as your buy signal. Maybe its justice department action. Maybe its the resignation of management. The point is that I could care less what P/E is because I don't believe the "E". Third, look back at similar situations over the last couple years. I would point to Oxford Health and Cendant. Then ask yourself whether you would have been happy to buy on the first big drop? Or the second?
Maybe I'm wrong, but I was sitting across the table from an analyst today who was telling me this stock is a no-brainer. I just wanted to respond, "only for an investor with no brain". But I was nice. Maybe I'm wrong and this is going to be a double in six months, but the only point I am making is that there is still a hell of a lot of risk here if this story plays out how I think it will. I have no evidence of fraud and I am not making accusations. I am only pointing out what my instinct tells me is high risk which I do not think is in the price yet. I've read a lot of 10-Ks and I've read SRV's. It made me say wait for single digits.
JJC |
