Value Line has recently introduced coverage of Carriage Services (CSV) in its flagship product, The Value Line Investment Survey. The company is a leading provider of death care services, with operations in the funeral home and cemetery segments of the market. The company is a consolidator in a fragmented industry.
At the mid-point of 2012, Carriage Services operated 164 funeral homes in 26 states and 33 cemeteries in 11 states. The fragmented nature of the industry, and the company’s role as a consolidator, means that these numbers are constantly changing. For example, at the end of 2011, it owned 159 funeral homes and the same number of cemeteries. The funeral home side of the business accounted for about 76% of revenues in 2011, with the cemeteries providing the remainder.
Carriage mainly serves suburban and rural markets. It believes that this allows it a competitive advantage since its competition in those areas is generally made up of smaller, independent operators. Its goal is to be a market leader in the markets it serves. The services it provides are either sold before a person’s death (preneed) or at the time of a person’s death (time of death). There are, quite literally, no other options.
The funeral home segment of Carriage Services’ business is viewed as a service business, providing funeral services such as traditional burial and cremation, and the sale of related merchandise, such as caskets and urns. The cemetery business, meanwhile, is seen as a sales business, providing interment rights (grave sites and mausoleums) and related merchandise (markers and memorials).
The death care industry is subject to a few fairly morbid factors. For example, Carriage Services’ business is sensitive to the number of deaths in the geographies in which it operates. Such factors as the strength of the strains of influenza present in a given year can have a material impact on performance. A longer-term issue is the fact that human life spans have been extended by advances in medicine, which, perversely, reduces this industry’s sales. Population growth and the breakdown of the age groups are also issues to consider.
The economic environment can also have a big impact on performance. Although at need sales tend to be somewhat less price sensitive than pre-need sales, families tend to reduce the amount they are willing to spend on the death of a family member during economic weakness. In fact, there has been a long-term trend toward more cremations, which are much less expensive compared to traditional burial methods.
Operating cemeteries and funeral homes is a relatively expensive proposition, leading to high fixed costs. As such, cost control is an important issue to monitor, particularly on the sales side with regard to pre-need contracts (such contracts accounted for about 50% of the revenue of the Cemetery operations in 2011). Cost controls extend to the acquisition front, as well, as this is a primary avenue for growth. Overpaying for an acquisition could have a material top and bottom line impact. Continued discipline on this front is key. Financial flexibility is another issue to keep in mind, since the ability to acquire new funeral homes and cemeteries is directly related to Carriage Services’ cash on hand or its ability to raise funds in the capital markets.
An additional issue to keep in mind, though not one that is primary, is the complex nature of cemetery finances. When a cemetery sale of any kind (at need or pre need) is made, money must be put aside in a trust for the maintenance of the plot or, in the case of pre-need sales, for services yet to be provided. These trusts are often invested, with those earnings often playing a material role in the earnings of the larger company. Interested investors should take a few moments to better understand this dynamic.
In addition to the regulations concerning the finances of cemeteries, there are other rules and regulations with which the company must comply regarding health and safety. Although these are fairly standard, failure to comply with any rules would open the company to fines. More importantly, being singled out as not following appropriate industry standards would tarnish the company’s reputation. Image is very important in the death care industry, so the financial impact of such a transgression would likely have long-term repercussions well beyond any fines.
Subscribers interested in taking a position in a business that everyone will eventually need should consult the most recent quarterly report for Carriage Services, while keeping an eye out for research updates highlighting late breaking news events.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.