There are only two certainties in life, death and taxes, which makes the deathcare industry a perfect place to invest. The deathcare industry within the U.S. is highly fragmented, although there are three publicly traded players. Service Corporation International (NYSE:SCI) is the industry’s largest player, followed by StoneMor Partners L.P. (NYSE:STON) and finally Carriage Services, Inc. (NYSE:CSV).
Carriage Services: Attractive investment in the deathcare industry
Carriage Services, Inc. (NYSE:CSV) is by far the most attractive investment out of the three. The third largest player in the market, Carriage’s operations are decentralized and the company is a selective acquirer. With only 12% of the whole deathcare market consolidated so far, there is plenty of room for Carriage to expand and drive sales.
Nevertheless, the deathcare industry itself is not expected to grow rapidly. Between now and 2020 sales across the industry are only expected to expand at an average annual rate of 1.6%. However, with 24,000, or 88% of the deathcare industry still represented by small locally owned independent operations, Carriage has plenty of room to bolt-on growth.
And based on the figures published over the last five years, if the company can continue to execute as it has done in the past, in many ways the sky is the limit.
Carriage Services’s acquisition criteria
Carriage Services, Inc. (NYSE:CSV)’s acquisition criteria are strict and rigorous. The company is targeting annual revenue growth of $15 million to $16 million per annum through acquisitions alone. Targets must meet the following criteria, as displayed in the company’s investor presentation.
- Target leading performers with strong heritage in their local markets
- Comprehensive analysis of a candidate’s financial profile and market demographics
- Focus on markets that perform better than the industry average and are generally insulated from economic and demographic changes
- Only consider businesses that will provide an immediate positive impact on cash flow
- Concentrate on higher revenue, higher margin, accretive businesses
- Exercise Financial Discipline through Valuation Model
- Maintain a stable and predictable business model
- Sustain EBITDA growth in line with revenue growth from acquisitions
So far, Carriage Services, Inc. (NYSE:CSV) has managed to pull this strategy off, with great success. Over the past five years revenue has grown at a steady CAGR of 3.6%, not a staggering increase but slow and steady. However, over the same period gross profit has increased at a CAGR of 5.8%. Pre-tax profit has grown at a CAGR of 14.9% and net income at a CAGR of 22.1%. Coupled with this growth, Carriage has driven sequential margin expansion and improving returns on investment, as a result of synergies gained from its deal making, as shown below.
But despite this strong performance, Carriage Services, Inc. (NYSE:CSV) is currently cheaper than its larger peer Service.
Carriage Services valuation
At present, Carriage trades at forward EV/EBITDA multiple of 9.1x for full year 2014, falling to 8.1x by 2015. The company’s FCF/Market cap is forecast at 12.1% for full year 2014 and 13.7% for 2015. EV/Revenue stands at 2.4x and 2.2x for 2014 and 2015 respectively.
Meanwhile, Service trades at forward EV/EBITDA multiple of 10.1x for full year 2014, falling to 9.6x by 2015. The company’s FCF/Market cap is forecast at 6.2% for full year 2014 and 6.8% for 2015. EV/Revenue stands at 2.6x and 2.5x for 2014 and 2015 respectively.
But this is by no means a rigorous analysis of Carriage Services, Inc. (NYSE:CSV), the above information is simply a summary of some of the company’s attractive qualities. The company, for those interested is definitely worthy of further research.