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