Carriage Services Inc. (CSV) operates in the very fragmented funeral services and cemetery business and has become the second-longest tenured consolidator. Carriage has been able to grow the total number of funeral contracts by 7.5% in the first quarter from fourth quarter 2019. This growth has come from both existing funeral homes and acquisitions. CSV is digesting four large acquisitions from the end of 2019 which should lead to improved margins, free cash flow, and reduced debt and leverage as 2020 progresses. At-need funeral contracts at acquisitions (any funeral business acquired after Dec. 31, 2015) jumped 27% in the first quarter of 2020.
Carriage Services’ stock has underperformed relative to its larger competitor, Service Corp. International (NYSE:SCI), and the S&P 500 Index. StoneMor Inc. (NYSE:STON) just received an offer to be taken private from Axar Capital Management.
Carriage Services released first quarter earnings and compared to fourth quarter revenue continued to show steady growth of 8.8% and SG&A costs were brought down by over 30% and back in-line with average quarterly costs, but net income and EPS were negative because of the one-time costs of acquisition and much higher interest costs related to the issuing of $75million of additional debt. Adjusted EPS were $0.35, which was up 25% compared to fourth quarter 2019. CSV has been able to maintain a strong gross profit margin of 29.9% for the first quarter. This is on par with the fourth quarter and their five-year average of 29.8%. This is also impressive compared to its competitor, Service Corp., which had a gross profit margin of 22.3% and a five-year average of 22.9%. CSV was able to generate free cash flow of $10.8 million for the quarter which is well off the fourth quarter number of $3.25 million and brings the ratio of FCF to revenue back to its five-year average.
This FCF is needed to pay down debt and reduce leverage. Carriage’s debt level jumped in the fourth quarter due to the acquisitions, but CSV is not planning any further mergers or acquisitions for 2020 so they can focus on integrating the new holdings, pay down debt, and improving profit margins. This pause shows the company is serious about driving profits, not just accumulating assets. The majority of their debt is due in 2025, but they have a call option in June 2021. As shown in Carriage Services’ graph below, they plan to use their free cash flow to exercise the call and pay off their $400 million in senior notes leaving their balance sheet in a stronger position for future asset purchases.
From Carriage Service Inc.’s website
A strong sign for the stock has been the recent insider purchases since May 2020. As shown by Morningstar Inc. there have been more than 200,000 shares acquired or purchased during these two months.
The technical indicators also look strong at the current stock price. It has outperformed the S&P 500 Index over the last 50 days, moved above its 50-day moving average and had more up volume than down volume. These all point to an accumulation of the stock.
Carriage Services Inc. functions in a unique market and has grown responsibly. With the integration of four new funeral homes and increasing pre-need and at-need funeral contracts expect to see free cash flow and profitability continue to grow along with the stock price.
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