The funeral/death care sector is a niche sector for investors as few listed companies exist in the space. However, when looked at closely, the death care industry is an excellent non-cyclical play. The death care industry is about $1.6 billion in Canada and $20B+ in the US. The sector is poised to benefit from the tailwind of an ageing population in North America despite cremation rates growing every year. Cremation is a lower-margin service than traditional burial funerals. In 2020, the cremation rate in Canada stood at 74% and 56% in the US.
While increasing cremation rates are bad news for the sector, the sector has high barriers to entry, and massive demographic tailwinds are a plus. In addition, the industry is very fragmented, with a few prominent private players; small/family businesses and churches own 80%-90 % of it. Surprisingly, the pandemic was not as good for the sector as expected due to increasing cremation rates and people staying away from elaborate funeral ceremonies due to its expense and social distancing. However, the industry looks strong in the long term due to an increasingly ageing population and a rising number of deaths. On average, deaths in the US and Canada are growing at 1% a year.
What's in the Article:
- 5 Best Funeral Stocks to Invest In Canada
- Why Invest in Funeral Home Stocks?
- A Great Non-Cyclical Play
5 Best Funeral Stocks to Invest In Canada
Park Lawn (TSE: PLC)
Park Lawn is the largest public death care company in Canada. The company is the third-largest company in the death care sector in Canada, behind Service Corporation and Arbor Memorial. The company operates a portfolio of death care properties, including 95 funeral homes, 38 crematoria, and 103 cemeteries across Canada and the US.
The company has been a remarkable growth story, with earnings per share growing at 13% annually over the last five years. In addition, the company has exposure to both cremation and funerals, making it a safe bet due to growing cremation rates. It’s one of the Stocks that are Recession Proof in Canada, since people need to be cremated at a minimum.
In Q1 FY21, the company reported $89.5 million, up 26% YoY, with a quarter EBITDA of $24.2 million, up 42% YoY, and a net profit of $9.75 million. In addition, the company pays a monthly dividend of $0.038 per share, representing a dividend yield of 1.35%.
Service Corporation International (NYSE: SCI)
Service Corporation is the most significant player in the death care space by market share in North America. The company has a presence in the US, Canada, and Puerto Rico. The company has 1500 funeral homes and 400 cemeteries across eight Canadian provinces, 43 US states, and Puerto Rico. In FY20, the company reported a 78% growth in earnings, far eclipsing its five-year EPS growth rate of 15.1%. Like Park Lawn, it has both traditional burial funerals and cremation verticals.
In Q1 FY21, the company reported $1.078 billion (up 34.2% YoY), EBITDA of $342 million (up 126% YoY) and net profit of $228 million (up 180% YoY). The company reported funeral sales growth of 16% and cemetery sales growth of 67%. Funeral gross margins grew 10% to 31% and cemetery grew 15.4% to 40%.
Carriage Services (NYSE: CSV)
Carriage Services is one of the biggest death care providers in the US. Compared to other businesses on the list, the company operates on a partnership model. Carriage Service lets previous owners of funeral homes that it acquires continue to run them.
The company has two operating verticals, funerals and cemetery. The funeral vertical provides burial services, funeral services, and caskets. The cremation vertical provides interment services, rights to interment services, memorials, and vaults. The company owns 183 funeral homes across 29 states and 29 cemeteries across 11 states.
The company reported record first-quarter results in FY21. Carriage Services reported revenues of $96.6 million, up 24.7% YoY, EBITDA of $45.8 million, up 52.1% YoY, and net income of $12.9 million, up 408% YoY. In addition, the company reported a massive increase in margins, with EBITDA margins growing 8% to 47.4% and free-cash-flow margins growing from 11.8% to 28.1%.
Hillenbrand (NYSE: HI)
Hillenbrand is not a pure death-care/funeral sector stock as it has multiple other lines of business; it is one of the largest casket providers and cremation product manufacturers in the US through its Batesville brand. Apart from Batesville, the company has a brand portfolio that operates in the industrial equipment space.
Under Batesville, the company provides high-quality burial caskets benefiting lumber stocks Canada, cremation urns, and memorialization products. The company also provides technology services to funeral professionals for planning services.
In Q2 FY21, the company reported consolidated revenues of $722 million, up 11% YoY, and net earnings of $78 million, up 4% YoY. Their Batesville business performed very well with revenues of $166 million, up 20% YoY, and EBITDA of $45 million, up 39% YoY.
Matthews International Corp. (NASDAQ: MATW)
Like Hillenbrand, Matthews International is not a pure death-care sector stock. However, it has deeper exposure to the business than Hillenbrand. Matthews, too, is in the industrial equipment space.
Under its Memorialization segment, the company produces high-end caskets and high-end metal decorative work for tombstones and funeral homes. Under its Industrial Segment, Matthews has crematoria equipment, making it a great play considering the growing cremation rates in the US and Canada.
In Q2 FY21, the company reported revenue of $417.2 million, up 11.3% YoY, and EBITDA of $60.9 million, up 23% YoY. Net income for the quarter was just $5 million due to a debt reduction of $42.1 million. Adjusting for the debt reduction, net income was $28.8 million, up 45% YoY.
Despite not being publicly traded, Arbor Memorial is a notable entity in Canada’s funeral home industry. With a substantial network of funeral homes and cemeteries across Canada, Arbor Memorial plays a crucial role in shaping industry standards and services, catering to diverse community needs with personalized funeral and memorial services.
Small and family-owned funeral homes hold a significant market share in Canada, offering personalized, community-focused services. These businesses are integral to the industry, often providing more customized and locally tailored funeral arrangements, and they play a crucial role in maintaining the industry’s diversity and accessibility, just like Canadian timber companies publicly traded.
Why Invest in Funeral Home Stocks?
Investing in funeral home stocks might seem unconventional, but it offers unique opportunities. The funeral home industry, part of the broader death care market, is often considered a stable investment due to the inevitability of death, making it relatively recession-proof. However, like any industry, it faces challenges and is undergoing significant changes, particularly with shifts in consumer preferences and the impact of digitalization.
- Changing Consumer Preferences: One of the primary challenges in the funeral home industry is the shift in consumer preferences towards cremation over traditional burials. Cremation is generally less expensive than burial, leading to lower profit margins for funeral homes. This shift is driven by cost considerations, environmental concerns, and changing cultural norms.
- Adapting to Lower Margins: As cremation becomes popular, funeral homes must adjust their business models to maintain profitability. This might involve offering a range of cremation services, including personalized or premium options, to offset the lower margins than traditional burials.
- Diversification of Services: To counterbalance the trend toward cremation, many funeral homes are diversifying their services. This includes offering pre-planning services and memorial products and even expanding into areas like grief counselling and estate planning.
Impact of Digitalization
- Online Memorial Services: The rise of digital technology has led to the growth of online memorial services. These platforms allow families to create virtual spaces to remember and celebrate the lives of their loved ones. This trend gained momentum during the COVID-19 pandemic when physical gatherings were limited.
- Digitalization of Operations: Funeral homes also adopt digital tools for internal operations. This includes everything from customer relationship management systems to digital record-keeping, improving efficiency and customer service.
- New Revenue Streams: Digitalization opens up new revenue streams for funeral homes. For instance, live-streaming services for funerals and memorial events have become a new norm, catering to relatives and friends who cannot attend in person.
- Adapting to Consumer Expectations: Today’s consumers expect a certain level of digital engagement. Funeral homes that embrace digitalization can meet these expectations, offering more accessible and flexible services to families.
Investing in funeral home stocks offers a unique opportunity in a market that is both stable and evolving. While the industry faces challenges like changing consumer preferences and adapting to digital trends, these also present opportunities for growth and innovation.
A Great Non-Cyclical Play
In Canada, the 60-79 age bracket has more than doubled since 1980 and is projected to make up nearly 18% of a projected total population of 62 million people by 2060. Furthermore, the 80+ age bracket is expected to quadruple by 2060. In the US, the 60-79 age bracket is expected to grow from 13% of the total population to 21% by 2060, with the 80% age bracket expected to quadruple by the same. You can also look at publicly traded assisted living companies.
High barriers to entry also aid the sector because of less zoning of land for burial purposes and no shortage of burial plots. Apart from that, the prominent players in space have significant operations in both traditional funerals and cremations. Thus making the sector a tremendous non-cyclical and non-discretionary play.