July 23 (Bloomberg) -- Service Corp. International, the biggest U.S. funeral-home and cemetery owner, is becoming a magnet for hedge funds which see the rising death rate among Baby Boomers as the surest way to resurrect the company's shares.

Steven Cohen's SAC Capital Advisors LLC added almost 2 million shares in the first quarter to increase its stake to 2.2 percent, according to regulatory filings. AQR Capital Management LLC, run by Cliff Asness, also boosted holdings in Service Corp.

``There is a demographic benefit as the Baby Boom ages and the death rate rises,'' said Dana Walker, a portfolio manager at Kalmar Investments Inc., which oversees $3 billion in Greenville, Delaware. ``The flow-through, in a top-line and a bottom-line sense, ought to be very generous.'' Kalmar owned 1.2 percent of Houston-based Service Corp. as of March 31.

After at least four decades of declines, the U.S. death rate will rise to 9.3 per thousand people in 2020 and 10.9 per thousand in 2040, according to projections from the National Funeral Directors Association in Brookfield, Wisconsin.

The mortality rate was 8.1 per thousand in 2006, the trade group said. The 78 million Baby Boomers were born from 1946 to 1964.

Two analysts surveyed by Bloomberg estimate Service Corp.'s shares will rise more than 50 percent to $15 in the next 12 months. A third doesn't have a price target. All recommend buying.

2 Percent

The shares have fallen 30 percent and underperformed the Standard & Poor's Midcap Consumer Discretionary Index by about 18 percentage points this year through yesterday. They rose 7 cents to $9.94 at 4:15 p.m. in New York Stock Exchange composite trading.

Boomer deaths may start to have a significant impact on business by 2013 or 2015, Service Corp. Chief Executive Officer Tom Ryan said in a telephone interview from Houston.

``If you look at the number of deaths that occurred within the U.S. over the last few years, it's been relatively flat,'' Ryan, 43, said. ``When you get out into the Baby Boomer years, you'd begin to expect that volume would increase to the tune of 2 percent a year.''

Service Corp., with 2007 sales of $2.29 billion, has a market share of about 15 percent, according to Raymond James & Associates Inc. analyst John Ransom.

Stewart Targeted

The company yesterday offered to buy its largest competitor, Stewart Enterprises Inc., for $11 a share in cash, or about $1.04 billion, based on 94.6 million shares outstanding as of April 30. Stewart rejected a bid of $9.50 a share earlier this month. Together, the companies would control about 20 percent of the market, Ransom estimated.

SAC Capital Advisors owned 6.1 percent of Stewart as of May 22, according to regulatory filings.

The takeover offer comes almost two years after Service Corp. bought Alderwoods Group Inc., at the time the company's largest competitor with about 700 funeral homes and cemeteries.

Stewart, based in Jefferson, Louisiana, owns 221 homes and 139 cemeteries. The company said today that its board met to consider the new offer and formed a committee of independent directors to evaluate ways to ``maximize shareholder value.''

The committee may hire an investment banker or other advisers, according to a Prime Newswire statement.

Ryan's plan for gaining market share is to encourage so- called pre-need customers to buy funeral and burial services before they die, the CEO said.

``If you wait around for people to make the decision after death, we're no different from everyone else,'' Ryan said. ``Our difference is, let's talk about this now.''

Service Corp. guarantees pre-need customers a set price on items such as cemetery plots, grave markers and funerals and limousines. It doesn't recognize any revenue until after the buyer dies and the contracts are fulfilled.

More Advertising

Pre-need sales make up about 13 percent of total revenue, Ryan said. That proportion may increase as Service Corp. boosts advertising through new media, including the Internet and television, he said.

The company invests pre-need sales proceeds in three trust funds, putting the cash into stocks and bonds to try to outpace inflation. The funds manage about $3.5 billion in assets, Ryan said, and about 8 percent is paid out each year as customers die.

The company's stock has declined this year, partly from concern over the trusts' returns as markets have fallen, Walker said. The actual impact is ``muted and smoothed,'' Walker said, because Service Corp. invests conservatively and the returns are reflected over many years.

Jonathan Gasthalter, a spokesman for SAC Capital, declined to comment. Brian Maddox, an outside spokesman for AQR with FD, a public-relations firm in New York, also declined to comment.

Service Corp.'s challenge is to convince consumers to make burial arrangements before they die, when the purchase isn't immediately necessary, rather than leave the decision to a relative later, Ryan said.

Death ``is not a discretionary spend,'' he said. ``Last time I checked, we can't necessarily stop that.''

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net.

Last Updated: July 23, 2008 17:31 EDT