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Impending death of generation pumps new life into funeral home stocks

17 January 2017 in Trading Ideas

Key Takeaways:

  • The aging of Baby Boomers will provide steady revenues for funeral home operators
  • Almost 80% of funeral homes are privately owned, giving chains room for growth
  • Successful funeral services and product companies are diversifying to counter trends

There are only two things that are certain in life, the saying goes: Death and taxes. And as the leading edge of the Baby Boom generation enters its eighth decade of life, it doesn’t require a terribly morbid imagination for investors to see financial opportunities posed by the rapid aging of 75 million Americans.After decades of being the demographic center of attention, Boomers are on their way out. They were overtaken as the largest generational cohort by Millennials in 2015. By the middle of the century, demographers expect there to be fewer than 17 million surviving Boomers. That works out to an average of 1.65 million Boomers dying every year, roughly three every minute, although as many as 3.6 million are projected to die in 2036.

That means big profits for the funeral industry, already a $20 billion behemoth with 130,000 employees that has shown few signs of slowing down over the last half-century. The typical funeral cost about $5,700 in 1960. Even though the number of cremations has increased more than eight-fold since then, the costs haven’t dropped much; a typical funeral currently runs between $8,000 and $10,000. Share prices in the three major funeral providers in the U.S. – encompassing coffins, memorials and services — have increased sharply over the last year, and demand for their services isn’t likely to slow for years to come. And while a majority of Americans will be cremated in the next few years (rising to 70 percent of all deaths by 2030) the difference in costs between funerals involving burials and funerals with cremation is surprisingly small, with a median of $6,100 for a cremation vs. $7,200 for a burial.

Museum Piece

The funeral home industry is an amazingly diverse business; about 80 percent of the 19,300 funeral homes in the U.S. are owned by families or individuals. Two companies, Carriage Services Inc. (CSV) and StoneMor Partners (STON), own about 5 percent. The remaining 16 percent is owned by the Houston-based Service Corp. International (SCI).

It’s not every company that creates a museum to its product; Robert L. Waltrip, SCI’s former chief executive, established the National Museum of Funeral History in far north Houston in early 1992. Museum aside, though, SCI is best known for a two-decade-long acquisition binge that has raised its total number of funeral homes above 1,500. The acquisitions have fed growth that has sent the company’s stock price on a generally upward trajectory since early 2009, when they bottomed out below $3.50. SCI shares currently trade slightly below $30, up more than 25 percent over the last year.

Since 2013, a majority of SCI’s funerals have involved cremation. The company noted that its revenues for cremations are lower than traditional burials. Even so, the company has a significant $9.2 billion “backlog” of revenue from preneed sales, where future customers put down a deposit, fixing a future service at a set price. Those preneed services are generally bought by people in their early 60s to early 70s, according to a company presentation – essentially, the leading edge of the Baby Boom generation.

Diversified Caskets SCI has reasons for optimism based on demographic trends; Hillenbrand Inc. (HI), the parent company of the 111-year-old Batesville Casket Co. of Indiana, is fighting cultural headwinds. While the company’s caskets are available in 90 percent of U.S. funeral homes, the number of casket sales peaked in 2000, and cremations overtook burials as the most common form of body disposal in 2015. More than one-third of all funeral homes in the U.S. offered cremation services in 2014, and 7 percent planned to build or open their own crematorium.

Ordinarily, such trends would spell doom for a casket manufacturer. Hillenbrand, however, has used a flat but reliable revenue stream to acquire manufacturing equipment companies, such as TerraSource Global, Rotex and Coperion. The company said in a recent filing that it now expects the equipment manufacturers to account for more than two-thirds of its growth.

The diversified approach has won fans among investors, who have compared it to Warren Buffet’s Berkshire Hathaway (BRK.B) for its use of a steady cash flow from a primary product to fund acquisitions. Over the past year, Hillenbrand shares have gained almost 50 percent.Putting Down Markers

Matthews International Corp. (MATW) has looked for a different way out of the declining revenues box. Together with Hillenbrand, the Pittsburgh-based company controls about 70 percent of the casket market . Matthews became the second-largest player in the casket market in 2015 after acquiring Aurora Caskets for $214 million.

Despite the focus on caskets, Matthews has attempted to differentiate itself as a “memorialization” business that also offers urns, markers and other memorials that aren’t as subject to the growing cremation trend. Matthews also has diversified into brand marketing, acquiring SGK Inc. for $577 million in 2014. The brand marketing division now makes up more than 50 percent of Matthews sales; the funeral products division is responsible for 41 percent of sales.

Like Hillenbrand, the strategy has paid off. Investors have rewarded the company with a 50 percent boost in stock prices over the last year. Since early 2009, Matthews stock has more than doubled, rising above $70 per share.

Motifs: Rest in Peace Growing Dividends