Why I bought the stock

Why I bought CSV

Published on:
January 25, 2019
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

Carriage Services, a funeral home company, has two lines of business. Funeral homes operations, the first of the two, consists of: (1) ceremony and memorial services, (2) disposition of remains either through burial or cremation and (3) memorialization through monuments or inscriptions. Funeral homes operations are about 80% of Carriage's revenue.  

The second line of business is cemetery operations. Carriage operates 32 cemeteries in 11 states. Cemetery operations generate revenues through sales of internment rights and memorials, installation fees, finance charges from installment sales, contract and investment income from preeneed cemetery merchandise trusts and perpetual care trusts.    

Preneed programs

These programs enable families to establish in advance the type of service to be performed and the products to be used. Preneed contracts permit families to eliminate issues of making death care plans at the time of need and allow input from other family members before the death occurs. The contracts are paid on an installment basis. The performance of preneed funeral contracts is usually secured by placing the funds collected in trust for the benefit of the customer.

Carriage sold about 7,500 preneed funeral contracts over the past five years. As of 2017, the company had a backlog of 93,712 preneed funeral contracts and 63,523 cemetery contracts to be delivered in the future.

The two risks Carriage faces

Two trends are and will continue to hurt companies that operate in the funeral and cemetery business. The first negative trend is that we bury less people today, as I noted last week.

In 2017, the number of burials in the United States decreased by an estimated 0.8%. The burial rate was estimated to be 48.5% and is estimated to fall to 43.3% in 2022. It is estimated that there will be about 1.3 million burials in 2021, declining from 1.36 million in 2017, according to the 10-k report.

The second negative trend is that the number of cremations is increasing. The number of cremations increased by 5% in 2017 following increases of 4.3% in 2016 and 7.4% in 2015. In 2021, it is estimated that there will be about 1.7 million cremations in the United States and a cremation rate of 56.7%. "Nobody is yet writing undertaking's epitaph," wrote The Economist in Great News for dead: the funeral industry is being disrupted", "but the industry will have to adapt."  


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Could Carriage be an exception to the rule?

Carriage has done a reasonable job fighting off these two industry trends. Over the past five years, revenue increased by 4% compounded annually, to $201 million from $163 million. Net earnings, adjusted for non-cash items such as depreciation and amortization, increased by almost 8%, to $36 million in 2017 from $25 million in 2013. Equity balance increased by about 5%, to $198 million in 2017 from $156 million in 2013.

Carriage generates plenty of cash to meet debt service obligation, too. In 2017, for example, Carriage gross revenue was $104 million; it had general and administrative cost of $26 million and $13 million in costs. There was $65 million in cash flow to service the reported interest expense of $13 million, an adequate coverage of about 5 times. 

The company reported $121 million in long term liabilities, compared to tangible total assets of $615 million, a ratio of 20%. To get to the tangible total assets, I removed the intangible goodwill assets of $306 million.

Why I bought the stock

While a faux pas to buy shares in a company whose industry tailwinds are working against, I decided to buy 1,000 shares of Carriage at a total price of $16,000. My investment thesis is as follows: A reasonable market valuation for Carriage, in my opinion, is a price to earnings multiple between 15 to 10 - the average trailing three years earnings per share.

Since the average earnings per share over the past three years were $2, I estimated the value of Carriage to be $20 to $30. My cost basis was $16 per share, and I intend to hold the stock for at least two years. This translates to a 2-year expected return between 12% and 37%.    


The number of deaths in the United States over the past three years increased by 2% each year. This is the result of a rapidly growing and aging population, which is expected to increase the numbers of deaths in the foreseeable future. Americans 65 and older are the fastest-growing segment of the population, with 48.2 million, expected to increase to 55.7 million in 2021, an average annual growth rate of 2.9%.

While many investors would regard the preceding statistic as tailwind for the industry, I would like to point out to the reader that often statistics do not translate to earnings for the investor.

Consider the airline industry, for example. This technological innovation has completely changed how we think about travel and how global trade is performed. And yet, the airline industry proved to be a poor investment vehicle for the investor.

Investors in the airline industry learned, over the past 50 years, of customers’ lack of loyalty to a brand, the rising cost of both labor unions and regulation and the challenging, volatile landscape facing buyers of fuel. Benjamin Zhang, writing for Business Insider, adds that congestion, passenger comfort and pilot shortage are increasing problems, too.  

For the funeral stock investor, a similar investing outcome may prevail. Workers at funeral homes provide a humane service, filled with emotion and empathy. It is important work. 

Yet this humane profession will not necessarily translate into stellar returns over equity ratios or net profit margins. In short, macroeconomic trends should not drive your investing decisions. In Peter Drucker’s own words, “No single piece of macroeconomic advice given by experts to their government has ever had the results predicted.”

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