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The most defensive industry in the world is death care. According to the National Funeral Directors Association, the number of deaths per 1,000 of population is expected to rise from the rate of eight per year in 2011, the most recent available data, to 8.4 by 2020, 8.9 by 2030, and nearly 10 by 2045. This is a compound annual growth rate of about 2.9%. What's more, it is likely that the number of deaths will continue to rise as the median age of the US population continues to rise.
The industry is fragmented
Companies like Service Corporation International (NYSE: SCI ) and Carriage Services (NYSE: CSV ) are set to benefit from this trend. However, the death-care industry is highly fragmented and approximately 86% of the funeral homes within the United States are privately owned. That said, despite the rising number of deaths during the past decade, the number of US funeral homes has actually declined around 9.5% over the same period, according to data from 2012. Despite this decline in death-care facilities, funeral home revenue actually expanded 8% during the period 2002-2007, indicating that the facilities are becoming more and more popular.
Having said all of that, the number of cremations taking place instead of burials is rising, not good for death-care facilities. The average cost of a funeral + burial was $6,560 back in 2009; factoring in inflation, we can assume the average cost now stands at around $7,400. Obviously, the cost of a cremation would be significantly less than a burial as 50% of the funeral + burial cost is for a casket, use of a hearse, and embalming of the body.
Cremations now account for 42% of all funerals, up from 26% back in 2000 and only 3.6% in 1960. The rising number of cremations could be the reason for the declining number of funeral homes, as both margins and profits are compressed.
Bigger is better
So, in a relatively fragmented industry where we can assume that margins are falling, bigger is better and the sector leader is Service Corporation International. Service has 1,437 funeral locations within the United States as well as operations within Germany and Canada. Service's facilities account for around 12% of the United States' increasingly fragmented death-care market.
Service is not Google, Apple, or Tesla. In other words, the company is boring, but it is growing steadily. During the past 10 years, earnings per share have grown at a compound annual growth rate of 8.7% and revenue per share has expanded at a CAGR of 4.1%. Over the same period, the company's stock price has gained around 12.8% annually; as I said, boring, but predictable and a steady grower.
More than a century of experience
The sector's second-largest operator is Stewart Enterprises (NASDAQ: STEI ) . Around since 1910, Stewart certainly knows how to deal with death after a century of operations.
Stewart has a reputation for efficiency and high volume, indeed, despite the company's relatively small size in comparison to Service (market capitalization of $1.1 billion compared to Services' $3.9 billion). The company has actually, achieved the same average 10-year operating margin as Service (15%). Moreover, both companies have similar cash conversion ratios of 50% and 54%.
Having said that, Stewart lags when it comes to growth. Earnings per share have expanded at a CAGR of 2.4% for the past 10 years and revenue has only grown slightly faster at a CAGR of 3%. So, all in all Stewart appears to be falling behind.
Large payouts, slow growth
In comparison, we have StoneMor Partners (NYSE: STON ) . As a partnership, StoneMor distributes all of its income to unit holders. However, I believe that this is actually holding back growth. In particular, the company's revenue per share (unit) has expanded at an agonizingly slow 1.6% annually on a compounded basis during the past 10 years. Factor in inflation, and this rate is negative.
Furthermore, StoneMor's EPS have been negative for the past four years, but considering the company is a partnership this is not so important. The company's operating income, on the other hand, a more accurate measure, has only grown 0.9% over the past 10 years -- hardly impressive considering the growth rates of its peers. That said, during the 10-year period, StoneMor has distributed $19.47 per share in dividends, although the stock price has only moved 2.5% during the same period.
Over the past 10-year period StoneMor's total return has been 121%, unfortunately, Service has returned 263%.
Berkshire Hathaway of death care?
Lastly, I want to mention Carriage Services, a small death care company ($300 market cap.) but with big ambitions. Carriage's performance has been similar to that of its peers during the past few years, with one exception. The company's trust funds, which were taken over by Ben Brink as assistant treasurer back in Jan 2009. Brink transformed the asset management side of Carriage, buying distressed fixed income securities back in the midst of the financial crisis.
Since the beginning of his stewardship, investment income has tripled an capital gains over the past four years have been around 120%. Management has stated that income from this portfolio accounted for $12 million, or around 50% of pre-tax income during the last twelve months. This gives the company a stable and predictable income base and a spring-board for carriage to grow.
All in all, death care is an extremely defensive industry that likely to see nothing but growth over the next few decades. It would appear the best way to play this trend is with Service Corporation International as the company's steady historic growth and 10-year total return of 263% looks to be the best in sector.
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