Carriage Services Stock Sees Resilience Against COVID-19 Declines (NYSE:CSV)

Published on the Value Lab 6/9/22

Carriage Services (NYSE:CSV) is one of the more major US players in the funeral services industry. The fact that it’s market cap is around $500 million tells you how fragmented and regionalised this industry still is. Their margins are fantastic, but are being eroded by labor inflation, logistics but also larger overhead from opening a new marketing department. Funeral home businesses are very cash-generative businesses with attractive economics and a recession-resistant profile. We think that trading at its low multiples CSV is a buy.

Q2 Comments

The performance of the company was strong. From a revenue side things continued to improve although only slightly across its two business lines of funerals and cemeteries.

In the funeral business they sell a full suite of services for the funeral service, including hearses, funeral rooms, caskets, cremation services etc. In cemetery they sell interment rights for remains into their cemetery properties. This revenue is partially recognised immediately while the rest is put into a trust and is recognised on an extended basis as that trust generates investment income and becomes distributed. All this upfront cash is attractive, and they are managing it well relative to the market, where it only declined 5.9% this year versus the 20% declines in the markets.

The revenue increased on a comprehensive basis by 2.1%, which is strong since the pull-forward effects from COVID-19 are abating completely, where COVID-19 related contracts have declined by almost 50%. So the continued albeit modest growth is a testament to the company’s sales execution but more importantly the funeral home market, which is very recession-resistant.

The operating profit side of things is where we saw a bit of issues. Higher cremation rates typically associate with a worse mix, and they increased slightly by about 0.5%. More importantly, labor inflation has been responsible for a lot of the EBITDA margin declines, which totaled about 2.7%. These two effects were responsible for about half of the margin declines in total. Furthermore, logistic costs do pressure the margins too. On a segment basis, the cemetery segment was affected by some margin compression from higher credit loss reserves on account of the challenging macroeconomic environment. These are non-cash losses, but reflect the possibility that preneed revenues don’t materialise as the purchase of interment rights is expensive. In the cemetery segment they accounted for about half of the operating margin decline of 550 bps as expenses grew, and a third of the margin 100 bps decline in funeral services. Operating margins fell from 45.3% to 42.6%, so quite a beefy decline.

Preneed revenues fell in the mix from both of the segments, but from a decline in preneed interment right prices but also in funerals because of pressure on discretionary spending due to consumer uncertainty. Preneed revenues are especially cash-generative because they bring forward a lot of cash that can be invested in the interim. With improved rates on risk-free bonds this enhances the return on this restricted part of working capital, where deferred revenues from preneed sales have to be held in trust.

Conclusions

The deltas in the quarter show margin pressure, but while technically being consumer discretionary, it isn’t really. When someone dies arrangements need to be made. People want to honour the dead, and they also want it taken care of quickly since there’s so much other stuff that goes into administering someone’s death, including inheritance. People don’t go bargain hunting and price comparing. All these factors protect the industry margins a lot and create a very solid revenue outlook even in the face of macroeconomic concerns which are already evident among consumers. At a 9.5x EV/EBITDA, this is cheaper than Service Corporation (SCI), CSV’s larger national competitor. CSV is also a US player, and the demographic in the US is fantastic relative to other western nations. There is no fall-off of people in middle-age that will be entering into dependent ages, and their mortality will start to rise in a couple of years and follow baby boomers into the funeral services markets. In our eyes, this is a very solid buy for investors looking to respond to uncertainties in the markets.

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