Deathcare is an industry that is always going to be in demand. Indeed, there will never be a shortage of death and death rates will always rise as the population continues to grow at an ever faster rate. However, there are not that many investments that the average investors can make in the market for death unless they decide to go out and start a firm themselves.
Size and experience
Size and experience are key in the deathcare market, as customers are more likely to choose an experienced provider with low costs due to economies of scale over an unexperienced and expensive provider.
Service Corporation International (NYSE:SCI) was founded in 1962, so the company has experience and plenty of size with around 2,000 locations across 48 states and 8 Canadian provinces.
Carriage Services, Inc. (NYSE:CSV) was founded in 1991 and has 250 locations in 12 states while StoneMor Partners L.P. (NYSE:STON) is the youngest, founded in 1999 with 300 locations across 18 states.
So Service Corporation International (NYSE:SCI) has the size and experience, but does it pay off?
Returns
| Company | Gross margin | Net margin | Return on shareholder equity | Return on assets |
|---|---|---|---|---|
| Service | 24.5% | 9% | 11% | 1.5% |
| Carriage | 32% | 10% | 8.4% | 1.5% |
| Stonemor | 80% | – | – | – |
StoneMor Partners L.P. (NYSE:STON) reported a negative net income for 2012, so it is not possible for me to calculate a return on equity or assets. That said, StoneMor Partners L.P. (NYSE:STON) appears to be one of the most profitable of the group with the widest profit margin; however, this point is annulled to some degree as the company is not profitable, but it does reward its shareholders with the best dividend payout in the group.
Being the largest in the trio, Service Corporation International (NYSE:SCI) has the lowest profit margin, but produces the best return on equity. Carriage Services, Inc. (NYSE:CSV) sits in the middle with a gross margin of 32% and a return on equity of 8.4%.
Cash conversion ratio
The cash conversion ratio is a method of evaluating company efficiency and the ability to turn revenue into free cash. In particular, companies that have a high cash conversion ratio can offer the best shareholder returns as they have the most cash generative operations.
| Company | Cash flow from operations | Less: net capital expenditure | Dividend by EBITDA | Cash Conversion Ratio |
|---|---|---|---|---|
| Service | $369 | $115 | $525 | 48% |
| Carriage | $26 | $13 | $62 | 21% |
| Stonemor | $32 | $12 | $195 | 10% |
The method for cash conversion calculation is shown at the top of the chart, cash flow less capital expenditure dividend by EBITDA. As shown, Service Corporation International (NYSE:SCI) is the most cash generative company, converting around half of its EBITDA into free cash flow. StoneMor Partners L.P. (NYSE:STON) achieves the worst ratio and Carriage Services, Inc. (NYSE:CSV) once again sits in the middle.
So, overall based on key ratios concerning profitability and efficiency, it would appear that Service has used its size to its advantage and stands out above the rest of the group.
Predicted growth
Based on key business metrics, Service Corporation International (NYSE:SCI) is the best deathcare company but what about future growth? Well it would appear that Carriage Services, Inc. (NYSE:CSV) is set for the fastest growth this year as EPS are set to grow around 60% followed by 18% in 2014. Unfortunately, StoneMor Partners L.P. (NYSE:STON) is not forecast to generate positive EPS for the next two years, mainly due to its MLP structure. That said, the company’s sales are set to grind slowly higher than, but not as fast as the growth at either Service or Carriage Services, Inc. (NYSE:CSV).
| Company | EPS 2013 | Growth | EPS 2014 | Growth |
|---|---|---|---|---|
| Service | $0.88 | 27% | $1.00 | 14% |
| Carriage | $0.99 | 60% | $1.17 | 18% |
| Stonemor | $253 (Sales millions) | 5% | $267 (Sales millions) | 6% |
Foolish summary
Deathcare, as an industry, does not need much explanation or analysis of its future outlook. The industry has been, and always will be, in demand. However, as with every industry, only the best companies will survive, and it would appear, that in this case at least, Service is the biggest company that is achieving the best returns for investors with the best cash conversion ratio, strongest return on equity and steady rate of growth.
Having said that, one factor that I have not mentioned is cash return, or dividends. Stonemor, as a partnership, offers investors the best payout of $2.38 per share, which is a yield of 9.3% at current levels. Meanwhile, Carriage and Service only offer dividend yields of 0.5% and 1.5% respectively. So, income investors could consider Stonemor, while growth investors should look to Service Corp..
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends StoneMor Partners. The Motley Fool owns shares of StoneMor Partners. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Which Deathcare Company is the Best Investment? originally appeared on Fool.com is written by Rupert Hargreaves.
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