Saturday, December 26, 2015

11th AIM Student Equity Update: (by Avery Flyte): Carriage Services, Inc. (CSV): “Death, Love and Carriage Services”

Carriage Services, Inc. (Ticker: CSV): “Death Services - a growth industry?
By: Avery D. Flyte, student at Marquette University

 Image result for Carriage Services logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Carriage Services provides death services in the United States. CSV is poised to take away significant market share of its leading funeral home competitor, Service Corporation International. With an aging population, the death services industry has predictable outcomes - and CSV maintains a strong market share. 

• Rising U.S. interest rates coupled with a depreciating Canadian dollar stand to have a material adverse effect on Service Corporation International’s financial condition, results of operations, and cash flows.

• Management announced record results for the first nine months of 2015 and has raised its rolling fourth quarter outlook.

• CSV could be heading to new 52-week highs on the back of a superior consolidation and operating platform and a lack of international exposure.

Carriage Services, Inc. (Ticker: CSV). The death care industry has historically been fragmented with limited overlap between the funeral and cemetery segments of the industry. Today, such distinctions are diminishing as the death care industry is consolidating. As a leading stalwart within the funeral and cemetery industry, Carriage Services is poised to take away significant market share of its leading competitor, Service Corporation International.

A significant portion of Service Corporation’s revenue is derived from its Canadian operations. At December 31, 2014, approximately 5% of stockholders’ equity and debt and 8% of the company’s operating income was denominated in the Canadian dollar. According to calculations from BMO Capital Markets, the Canadian dollar has fallen almost 17% against the greenback since the start of January, leaving the single currency on track for its second-worst year ever. Its losses have been driven largely by a slump in crude oil prices and expectations that the U.S. Federal Reserve would start hiking interest rates this year.

Signaling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis, the Federal Open Market Committee decided to raise the target range for the federal funds rate to between 0.25 and 0.50 percent on Wednesday. Luca Mezzomo, Chief Economist at Intesa Sanpaolo, has stated that a 25 basis point increase in the federal funds rate could weaken the Canadian dollar by around 1.7%.

Subsequent hikes are expected in the coming months as Federal Open Market Committee intendeds to embark on a path to rate normalization. Therefore, it is reasonable to assume that the Canadian dollar will continue to depreciate going forward. The resulting fluctuations in exchange rates between the U.S. dollar and the Canadian dollar are likely to have a material adverse effect on Service Corporation’s financial, condition, results of operations, and cash flows. This reduction leaves Service Corporation’s market share wide open to be usurped by Carriage Services. Carriage Service’s lack of international exposure coupled with its superior consolidation and operating platform will enable the company to become the dominant player in the death care industry going forward.  

What has the stock done lately?
Carriage Services has a relative strength index reading of 45.45, with a 1-year total return of 18.33% and a six-month return of -0.56%. The stock is up 14.90% in one month through the last close, to $24.37, showing a 7.69% return during the past three months. The share price is up from fifty-two week low with 25.55% and low from fifty-two week high with -6.12%. It stands 1.79% above the average-price of 50 days and 4.77% compared with the 200 simply moving average.

Past Year Performance: Carriage Services is a robust company in a strong financial position. For the first nine months of 2015, Carriage Services achieved record results, driven by substantial contributions from both the Funeral and Cemetery Same Store and Acquisition segments. The company reported net income of $20.5 million or $1.09 per diluted share. This compares to $17.9 million or $0.97 per diluted share in 2014; 14.9 and 12.4 percent increases, respectively. Operating revenue totaled a record $180.9 million versus $166.7 million in 2014. Operating income totaled $36.2 million, a 32.6 percent increase over 2013. Meanwhile, operating cash flow increased 24.0%. Carriage Services is expected to increase its free cash flow further from 2016 onward, which will enable the company to pay off existing debts as they mature.

  Source: FactSet

My Takeaway
Carriage Services is a multifaceted enterprise that is strongly positioned to compete in the highly fragmented and competitive death care market. The company has displayed above average financial performance and has a strong cash position which will enable the company to finance the majority of its dividends, capital expenditures, acquisition activity, and share repurchases going forward. With momentum steadily on its side right now, Carriage Services is undoubtedly poised to enter new 52-week-high territory in the coming year - and should offer steady growth performance into 2016 and beyond.

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