In the long run, we are all dead.
-- John Maynard Keynes, "A Tract on Monetary Reform" (1923)
Alas, the long run for Mr. Keynes was cut a lot shorter than it should have been, unless you are of the supply side persuasion. He died in this, T.S. Eliot's "cruelest month" of April, aged only 62, despite being born to a long line of nonagenarians.
Still, the English economist would surely appreciate the impressive economies of scale and stellar stock performance of several names in the cemetery sector and funeral home industry of late.
One of them, Carriage Services Inc.
) is up an astonishing 188% in the past year. Yet turn to CNBC -- never known to under-hype a hot stock story -- and all you get is a perfunctory "There is no recent news for this security."
Contrast this with the endless daily articles analyzing every single squiggle in Apple
), whose performance in the identical period has been death warmed over by comparison, as former fans turn increasingly cautious.
Clearly this is a stealth space whose success stories are, far from hiding in plain sight, actually buried very deep. Understandably so, perhaps, since the industry's target market isn't exactly a warm and fuzzy topic, but it ultimately comes to us all and offers those still in the quick an occasional chance of a fast buck.
According to the National Funeral Directors Association (NFDA), which appears to update its data at an appropriately funereal pace, this sector recorded revenue of $11.95 billion in 2007, the most recent year for which such information is available. This is up steadily from half a decade previously. The Census Bureau estimates that approximately 2.5 million Americans expire annually, and many of us will end up interred in one of this country's approximately 50,000 cemeteries.
The industry employs its own unique euphemistic nomenclature, in which anything that smacks of "death" is often rechristened with a more pleasant sounding phrase, like "Post-Life Services." (Deceased customers represent "comparable sales.") And for a seemingly staid space, it often takes turns worthy of an Agatha Christie whodunit. "Formaldegate," a fiasco involving embalming violations, left a stain on the sector several years ago and a more recent "60 Minutes" profile exposed other nefarious practices, including bodies being exhumed in order to resell the lucrative resting places they occupied.
Boom, bust, back from the dead
Ironically, what one might think of as the ultimate safe haven group has often proven vulnerable to the sort of wild gyrations that tend to send Wall Street's widows and orphans running for cover.
The death care industry, salivating over an inexorably aging cohort of baby boomers, experienced impressive growth for much of the 1980s and 1990s. That era even saw the inception of the first collective investment vehicle dedicated solely to the sector, the Pauze Tombstone Fund, founded by the son of a casket maker. For the many believers in the mantra that "demography is destiny," the future appeared bright. Big players enjoyed breakneck growth fueled by aggressive acquisitions, the snapping up of independent operators, and prearranged funeral package sales.
But a funny thing happened on the way to the mortuary: Methuselah muscled out the Grim Reaper and people suddenly stopped dying in the numbers expected. Rapid advancements in health care were ascribed much of the "blame" for a development that only funeral industry insiders could call disappointing. Some bereaved families also balked at the specter of impersonal corporate-owned behemoths employing distant call centers to answer delicate inquiries, and took their business to a multitude of more local alternatives.
A series of accounting scandals and utterly unsustainable debt levels, piled up during the bubble years, compounded the misery, and by the turn of the millennium, the sector had suddenly become a dead man walking. A glance at the chart of industry leader Service Corporation International
) illustrates the extent of the calamity.
The poor stiffs stuck with the stock saw it slide 81% in 1999, making Service Corporation the single worst performing large cap equity in a year when losing money at times appeared almost impossible. Its competitor Carriage Services slumped about 74% in 2000, an annus horribilis on Wall Street that also claimed the Pauze Tombstone Fund, which kicked the bucket after an utterly undistinguished 35 months.
A prolonged period of rigor mortis subsequently set in, with necessarily brutal measures undertaken in order to repair decimated balance sheets. The industry found itself compelled to sell off assets and embark on a period of painful restructuring. (In the case of Service Corporation, the job cuts even extended to the founder's son.) A gruesome incident involving the dumping of corpses in Florida -- a retiree haven often referred to as "God's antechamber," despite being named by none other than Ponce de León of "Fountain of Youth" fame -- did little for image rehabilitation.
Slowly, the stocks started to show signs of life. Binge-era excesses were eventually unwound and historically low interest rates proved to be manna from heaven for easing onerous debt burdens. The industry also won plaudits for its increasingly inventive embrace of the internet, broadcasting funerals over the Web and branching out into areas including online memorials. In response to customer demand, it introduced more customized offerings along with a holistic approach that encompassed areas such as estate planning.
In recent years, while remaining a long way from its heyday, the sector has often handily outperformed the overall market. Indeed according to data from financial aggregator tickerspy, a basket of the six death care stocks profiled in this article have easily bested both the Dow Jones
) and S&P 500
) over the past half decade.
Before plowing head-first into the feet-first sector, investors should be aware of some risks. For the most part, it's an industry made up of inherently volatile small market capitalization companies and marked by a relative paucity of reliable sell side research. Our stubborn refusal to croak on cue, alluded to earlier, is an issue, as is the fragmented nature of a space in which small "mom and pop" players predominate to such an extent that the top four publicly traded funeral operators in the US account for a mere 10% of market share, according to the NFDA.
Although the group is relatively recession proof, penny pinching in a still-sluggish economy can crimp profit margins, even if most people will tend to spend whatever it takes to give old Aunt Edna a proper send-off. Of greater concern is an ever increasing tendency toward cremation. Long the preferred method of saying farewell in countries such as England -- whose latest invention involves finding fake friends for your funeral at about 68 bucks per pop -- the urn has now truly turned in America also. Our cremation rate has risen from a scant 3.56% in 1960 to fully 40.62% half a century on. Costly burial grounds bursting at the seams -- in New York City, Park Avenue penthouse prices have nothing on those of scarce cemetery plots when it comes to pricey property -- are one key contributor, along with changing cultural mores and a more mobile population where families often find themselves as scattered as ashes.
Cremations aren't a lucrative proposition for death care business, costing considerably less than the average funeral cost of $6,560, an amount that encompasses everything from the removal of remains to hiring a hearse. Far from showing signs of abating, the trend has now even "slipped the surly bonds of Earth" and started to venture into outer space.
Reasons for optimism
Still, the good news is that we are all eventually destined to die, and what other sector can offer investors a similar degree of certainty? (On the flip slide, as more than one industry expert has deadpanned, death care is the rare business where there is "no legal way to stimulate demand," at least since Jack Kevorkian shuffled off his own moral coil.)
Baby boomers may have bucked convention throughout their lives, but even they aren't immune to the basic rules of mortality. As a result the Census Bureau is expecting the number of deaths to increase by roughly 1% annually, from 2.5 million in 2009 to 3.1 million in 2025.
Such growth may not be sexy, but it should provide a reliable income stream for several years to come, being as steady as time and tide. Speaking of the seasons, the mortality rate spikes like clockwork each winter -- especially in a bad flu season such as the one we have just endured --and oppressive heat waves alike, as frighteningly evidenced in France. As a result, the sector is comparatively immune to vagaries of the calendar.
And shareholders can be richly rewarded if they are lucky enough to own an industry takeover target. To take two examples from recent years, The Alderwoods Group was bought out for $1.2 billion while Rock of Ages went for an impressive 84% premium.
6 Death stocks to consider
Below, then, are half a dozen stocks for when you go six feet under.
1. The death of Whitney Houston was the single most Googled event of 2012, but, in the death care business, it is Houston, Tex., that literally has the last word. Space City is home to Service Corporation International, easily the giant of the industry with a market cap of about $3.5 billion. The firm was founded in 1962 and, in addition to owning approximately 1,437 funeral service locations in this country, it has a considerable presence in Canada and Germany. It commands a market share of about 12% in an intensely fragmented business and the company's Rose Hill Memorial Park in California sprawls over an other-worldly 2,500 acres. Service's "Dignity Memorial" network was also an early pioneer in the now-ubiquitous trend toward national branding. The stock, having halted dividends for six straight years starting in 1999, currently yields about 1.42%, and shares have risen roughly 50% since April 2012.
2. Louisiana-based Stewart Enterprises Inc.
) is the sector's second largest name, and its shares have also levitated about 50% in the past 52 weeks. Dating back to 1910, the company boasts a market cap of $766 million with a divided of about 1.64%. Its business operations have a reputation for efficiency and high volume, and last month's first quarter results revealed an 80% increase in earnings per share, and $15.5 million in earnings.
3. Carriage Services is currently the sector's standout stock, having increased almost 200% over the past year to amply compensate investors for a comparatively minuscule 0.46% yield. The company, whose CEO and founder answers to the ominous name of Mr. Payne, has a small market cap of $390.1 million on only 18.1 million shares outstanding. Established in 1991, Carriage runs 167 funeral homes and 33 cemeteries and its beat-and-raise earnings release in February impressed investors.
4. Stonemor Partners
) is based in Pennsylvania, a state with America's fourth largest population of elderly people. It has traded about 2.69% higher in the past 12 months, a steady if unspectacular showing, but a plump 9.50% current payout is arguably the real appeal. Not strictly speaking a stock per se, Stonemor is instead structured as a limited partnership, complete with units and distributions. As both a "pass away" play and "pass through" entity, investors will therefore need to be cognizant of life's two certainties with this one. Consult your tax adviser before putting fresh money to work, especially with April 15 imminent. This funeral home owner and operator has steadily raised dividends for several years, although it missed earnings in March and a relative lack of free cash flow, allied to its high debt load, have led many to question the sustainability of its present yield.
5. Hillenbrand Inc.
), whose ticker symbol can be seen as somewhat ironic since it is in the business of helping people bid a final goodbye, has returned a healthy 9.59% in the 12 months. The Indiana-based diversified machinery outfit, with a market cap exceeding $1.5 billion, is increasingly branching out into other areas and thus no longer quite the pure play of yesteryear. That said, its Batesville Casket Company is the world's largest manufacturer of such items, commanding a U.S. market share that enviably approaches 50%. Hillenbrand also offers assorted urns and cremation vaults, and its relatively rich 3.09% dividend has grown at an impressive clip in recent times. Still, investors should be aware of a recent changing of the guard, with CEO Kenneth Camp having just announced his departure after 32 years at the company.
6. Matthews International Corp.
) hails from Pittsburgh, a city indelibly associated with steel industry icon and famous philanthropist Andrew Carnegie. The Scottish tycoon was renowned for saying, "The man who dies rich thus dies disgraced," and any owners of this stock, up a strong 7.38% in the past year and recently trading at fresh 52-week peaks, may now find themselves in the category that attracted his ire. Matthews International, founded in 1850, has outlived customers and competitors alike. With its well-timed purchase of The York Group in 2001, the company vaulted into pole position as a maker of items including memorials and bronze plaques. As visitors to Argentina's storied La Recoleta cemetery can attest, such aspects of the Great Beyond often run extremely grandiose, and represent a lucrative revenue stream. (Not that all of us can afford the opulence of the final -- or did I speak too soon? -- resting place of Eva Perón.) The stock sports a 1.17% dividend yield and boasts a market cap of just under $1 billion.
And finally, for anyone who finds specific mortuary stocks altogether too creepy, a couple of bona fide category killers offer tangential ways to play the industry. Wal-Mart
), the world's largest retailer, and Costco
), trading at fresh historic highs this week, have both jumped on the casket bandwagon.
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