Which of These 2 Funeral Home Services Providers Should You Invest In?

Counter-intuitively, boring companies make for good investments thanks to stable demand. Funeral home companies such as Service Corporation International and StoneMor Partners fit the bill.

Jul 17, 2014 at 10:37AM

Source: Service Corporation International

While the funeral home business doesn't offer the same growth prospects as either social media or medical technology, it's a recession-proof business that has stood the test of time. According to the U.S. Department of Commerce Census Bureau, the U.S. population aged between 55 and 65 is projected to grow at a CAGR of 2.3% between 2000 and 2017. In addition, the first batch of "Baby Boomers" reached age 60 in 2006.

This ensures that funeral home companies like Service Corporation International (NYSE:SCI) and StoneMor Partners (NYSE:STON) will benefit from a steady stream of customers in the foreseeable future.

Pre-need market growth
As more people plan ahead for their death, the pre-need death care market is growing. Service Corporation has guided for its pre-need funeral and cemetery sales to grow in the mid-to-high-single-digit percentage range for 2014. This growth rate is high, considering the fact that U.S. deaths have expanded by a CAGR of below 1% between 1935 and 2010.

Consumers typically don't shop around when it comes to picking a funeral home. This is partly because death is such a morbid affair and shopping at multiple funeral homes isn't a pleasure activity. As a result, most people rely on word-of-mouth and branding when they are searching for a potential funeral home services provider.

More importantly, they are more likely to go with the well-known incumbents and the first company they meet. According to data disclosed by Stonemor, 40% of its leads result in a client presentation, where the conversion rate is as high as 20%-25%.

Service Corporation remains the best positioned to capitalize on growth opportunities in the pre-need market. As the largest provider of funeral, cemetery, and cremation services, Service Corporation boasts a network of 1,638 funeral homes and 515 cemeteries in 43 states and eight Canadian provinces as of May 2014.

Service Corporation's Dignity Memorial is a unified national brand for both its funeral homes and cemeteries, while its cremation service brand National Cremation Society is the largest and oldest of its kind in the country. Due to Service Corporation's size and brand equity, it's at the top of consumers' minds when it comes to picking a suitable funeral home services provider.

Furthermore, Service Corporation has grown its team of sales associates to capitalize on the growth opportunities in the pre-need market. It expanded its sales force by 250 people, or 7%, year-over-year in 2013. This brings Service Corporation's sales team strength to 3,850, compared with approximately 800 for Stonemor.


Source: Stonemor

Cross-selling opportunities
Based on data released by the National Directory of Morticians, the U.S. death care market is valued at $17 billion, with funeral homes accounting for approximately two-thirds of industry revenues at $11 billion. The remaining $6 billion is contributed by cemeteries.

On the surface, it might seem that the funeral home business is far more important than the cemetery business since it's a larger revenue contributor. In reality, there are significant synergies between the two. If a cemetery has its own funeral home, clients are more likely to deal with a single death care services provider.

With that in mind, Stonemor has traditionally focused on the ownership and operation of cemetery assets. While Stonemor still lags behind Service Corporation in the number of cemeteries operated in the U.S., with about 278 locations, it has a largest proportion of cemeteries to funeral homes among its peers. Stonemor operates approximately three cemeteries for every one funeral home it has, while Service Corporation runs three funeral homes for every cemetery on average.

This suggests that Service Corporation has an edge in cross-selling its funeral home services to its clients who take up cemetery services. The cross-selling potential is validated by the fact that Service Corporation has a funeral home located on the cemetery grounds for more than half of its 500-plus cemeteries, aiding cross-selling opportunities for convenience-seeking customers.

Stonemor and Service Corporation's advantages derived from the ownership of cemetery assets are supported by favorable supply demand dynamics. Due to the scarcity (zoning restrictions) and high cost (especially nearly densely populated areas) of suitable real estate, there have been a limited number of new cemeteries constructed in the past decades, according to Stonemor research.

Foolish final thoughts
Service Corporation is my preferred pick between the two companies, given its consistent financial track record. Service Corporation has been profitable and free cash flow positive in every single year for the past eight years. Looking ahead, it is primed to benefit from the growing pre-need market with its scale, brand, and cross-selling potential.

Looking for sustainable gains for the next decade? Death care isn't your only option
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends StoneMor Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers