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When a person thinks of investing, the Funeral Services Industry is usually not a sector that immediately springs to mind. And why should it? Given the nature of its products, it is a gloomy sector that people tend to not focus on. However, it is an essential industry and, thus, better protected from the volatility of the current market, than many others. The Funeral Services Industry is fragmented, consisting mostly of small, family-owned funeral and cemetery concerns. While there are major companies in this sector, they make up roughly 10%-15% of the industry’s aggregate market. StoneMor Partners, L.P. (STON), Service Corp. International (SCI), Hillenbrand Incorporated (HI), and Matthews International (MATW) are some examples of prominent companies in this sector.

Businesses in this industry provide a variety of products and services. These range from urns, caskets, and memorializations to actual cemetery, burial, and cremation services. Companies also offer pre-need funeral arrangements, which serve as indicators of long-term growth.

The major current obstacle for the funeral services industry is its operating environment. Though the industry is, on the whole,  largely recession resistant, it has been affected, to some extent, by the broader economy. As a result of the high unemployment rate, many customers have chosen to go the route of cremation, and this trend does not look likely to reverse in the near future (more below).

As customers have flocked to cremation services, (a much cheaper alternative to traditional funeral services), this trend has reduced the top and bottom lines of many of these companies. In an attempt to fight back, several have started making inroads into the cremation market. For example, Service Corp International recently purchased Neptune Society, one of the largest crematoriums in the United States. This acquisition gives Service Corp. a major foothold in the cremation market, and the customer volume should partially offset the low prices that are the bane of profits in this sector. Other companies have since followed, buying up small cremation businesses, and making their presence felt in the market. However, investors should note that the low prices allow for marginal profit growth. At some point, therefore, the companies will have to come up with innovative ideas in order to flourish.

One company that has made strides to this end is Hillenbrand, Inc. The company has branched out into other sectors via its acquisition of K-Tron International, and now has two major businesses: Batesville Caskets, which deals with funeral services, and the Processing Group, a part of K-Tron and other brands under its umbrella, which deals with designing, producing, and marketing materials responsible for handling equipment and systems for various industrial areas. Management has stated it plans to diversify even further, in order to expand its business and bolster the top and bottom lines. Though Hillenbrand is unique in the scope of its expansion and diversification, it is quite likely that some of the other companies will follow its lead in order to expand their profit margins.

That said, there is some light at the end of the tunnel, and the operating environment ought recover over the next few years, as economic growth quickens. We do expect the customer base to start expanding again, as the baby boomer generation ages. This, in turn, should drive revenues and earnings from mid-decade on. Also, the economy will likely improve materially over the next several years, which should provide an additional boost, albeit a modest one.

This industry is for conservative investors interested in dividends. The dividend yields are often higher than the market average, and the companies in question (most with strong balance sheets) do raise their payouts fairly regularly. As always, investors should take a close look at Value Line’s individual stock reports before making any financial commitments.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.