I was recently listening to Mohnish Pabrai, a value investor, talk about how funeral businesses have the lowest failure rates. Here are some of the important points that Pabrai made while talking about funeral business:
- The population continues to grow, which means a guaranteed increase in revenue.
- It has high entry barrier simply because of the morbid nature of this business.
- Pre-need sales make up 25% of the total revenue for many operators i.e. people pay for services that they would need many years down the line.
- It is not a rapidly changing industry.
- Families want the last rites of their loved ones to be done right, so they don’t go looking around for the lowest bidder. In fact, families are likely to follow tradition and use the same funeral home that they have used in the past.
I also liked the fact that regardless how advanced technology or healthcare gets, everyone dies eventually. All the points mentioned above piqued my interest, so I started looking into publicly traded funeral services businesses. In this blog post, I will be comparing 4 such companies: Hillenbrand, Inc (HI), Carriage Services, Inc. (CSV), Service Corporation International (SCI), and StoneMor Partners L.P. (STON).
- Hillenbrand, Inc (HI) – Hillenbrand is a global diversified industrial company with multiple market-leading brands that serve a wide variety of industries across the globe. Hillenbrand’s portfolio is comprised of two business segments: the Process Equipment Group and Batesville. Batesville is a recognized leader in the North American death care industry.
- Carriage Services, Inc. (CSV) – Carriage Services, Inc. provides funeral and cemetery services, and merchandise in the United States. It operates through two segments, Funeral Home Operations and Cemetery Operations. As of December 31, 2018, the company operated 182 funeral homes in 29 states; and 29 cemeteries in 11 states.
- Service Corporation International (SCI) – Service Corporation International provides death care products and services in the United States and Canada. The company operates through Funeral and Cemetery segments. As of December 31, 2018, it owned and operated 1,481 funeral service locations; and 481 cemeteries, including 286 funeral service/cemetery combination locations covering 44 states, 8 Canadian provinces, the District of Columbia, and Puerto Rico.
- StoneMor Partners L.P. (STON) – StoneMor Partners L.P., together with its subsidiaries, owns and operates cemeteries and funeral homes in the United States. It operates through two segments, Cemetery Operations and Funeral Home Operations. As of December 31, 2018, the company owned and operated 322 cemeteries in 27 states and Puerto Rico; and 90 funeral homes in 17 states and Puerto Rico.
The picture below has a few key ratios that give us an idea of the fundamentals of each company:
Here is the pdf version of the picture above: DeathIndustry. Correction: For Current Ratio (which is Current Assets over Current Liabilities), you want this number to be above 1; preferably above 1.5.
From the last column in the picture above, we can tell that StoneMor Partners L.P. (STON) is not a good investment. Even though the company’s description looks similar to its competitors’ descriptions, STON is financially in a very bad shape. Looking at Carriage Services, Inc. (CSV), we can see that it has the highest P/E ratio, and the highest Free Cash Flow (FCF) to Net Income ratio. A high P/E ratio indicates that the company’s stock price is expensive, and a high FCF to Net Income ratio indicates that the company is getting cash from sources other than its operating income. In the case of CSV, it is through debt financing (borrowed money). At this point we are left with 2 companies worth looking further into: Hillenbrand, Inc (HI) and Service Corporation International (SCI). Both of them seem pretty good. The difference between these two companies is that HI has another segment of business which is non-funeral/death related, while SCI’s sole focus in the funeral/cemetery business.
After looking at the fundamental ratios, I went ahead and performed a Discounted Cash Flow (DCF) analysis with a 15% discount rate. As pictured below, I found the Intrinsic Value of HI to be about $38 per share, CSV to be about $14.5 per share, SCI to be about $15.57 per share, and STON to be N/A (negative FCF). In comparison to the intrinsic value, the current price of HI is $37.48 per share, CSV is $20.57 per share, SCI is $43.44 per share, and STON is $2.61 per share. So, it looks like HI is the most “undervalued” of these 4 stocks. Now, if you were to only look at the stock prices, you would have probably invested in STON since it is the “cheapest”. However, after looking at the fundamentals, we could easily rule out STON. The last row in the picture below is for Expected Rate of Return (RoR). If you were to invest your money at the current stock price, the expected RoR gives you an idea of what kind of annual return can you expect to get on that investment for the years to come.
Here is the pdf version of the picture above: IV-DeathIndustry.
Out of the 4 companies that we compared today, I personally liked Service Corporation International (SCI) the most. Although its low current ratio brings concerns, I was highly impressed by its inventory turnover ratio. I also liked the fact that it was solely focused on the funeral/cemetery business. I prefer companies that are great at doing just one thing, versus being above average at multiple things. It’s time to go through SCI’s annual statements (10K) to better understand risks involved with this business. SCI is on my radar now.
Hope you learned a little and found this blog post helpful. We analyzed 4 companies in the funeral services business: Hillenbrand, Inc (HI), Carriage Services, Inc. (CSV), Service Corporation International (SCI), and StoneMor Partners L.P. (STON). We compared various fundamental ratios, intrinsic values, and expected rate of returns. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions.