The death business is not as easy as you think

The business model is not as obvious as you think

Published on:
January 18, 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.

Warning: this week’s meditation is not for everyone. I decided to look at the business model of companies in the funeral and cemetery domain. And for readers who are experiencing a life event and are forced to deal with the loss of a loved one, perhaps it would be best to avoid this week's essay.

The funeral business

At a first glance, the funeral business has all the right qualities. Competition from new entrants to the industry is relatively low as recent MBA grads hardly set their career path in the morgue business. The funeral and cemetery business is not the type of profession that would make your mom proud.

In addition, China or India, the low cost-provider nations of the 21th century, will not easily replace your local cemetery and funeral home. 

Not everything in life revolves around price, and certainly, in the morgue business, you typically don’t see customers shopping around for the best deal out there. Quite the opposite. The funeral business is a local market where word-to-mouth marketing plays a vital role (pardon the pun.)  

The changing consumer preference

What affects the apparent “moat” of the funeral home business model is the change in burial methods. Traditionally, in Christian societies, the normal practice was to bury the dead. This tradition required us to pay for the following: the basic service of funeral director and staff = $2,200, embalming = $800 and transferring the deceased to the funeral home = $450. And you would be charged by the mile. In California, the total cost of a funeral amounted to no less than $8,000 to $10,000.

Until the last two decades or so, all monotheistic religions strongly argued against the second option of burial, which is also much cheaper: cremation. Their basic reasoning was that cremation interferes with some of the beliefs of resurrection and the afterlife.

But as society is becoming more secular and conscience about the environment, both leaders of faith and their followers are changing their opinions about burial methods. This change in consumer preference results in different economics for the funeral business.  

‍Source: National Funeral directors Association

I visited the website of a local funeral home and saw that they offered “a direct cremation, with cloth covered casket, for $2,185." It is little surprise to see that the majority of consumers are choosing to cremate the dead. According to the National Funeral Directors Association, the cremation rate in the United States in 2016 was 50% and was expected to increase to 64% by 2025 and 79% in 2035.

Finance is affecting the funeral business, too

In the past, funeral home customers waited until the passing of a loved one before they would visit and arrange for the funeral. This procrastination did not favor the consumer. While grieving, they signed contracts without reading the fine lines. And most certainly they did not “shop around” for better deals. At times of duress, we hardly think of cost and benefit.

But that rarely happens today. There is much focus in the media about planning and preparation for D-day. Nowadays, most customers are planning their arrangements (and paying for them). And as customers are paying for services years in advance, they, on average, can make rational, informed decisions. The customers are paying in installments, a financial invention of the last two decades.  

The funeral business is fragmented

An industry fragmented often results in new entrants to the industry, with grand ambitions of consolidation and economics of scale. Consider Uber entering the tax business; or Uber entering the hospitality industry. Small operators do not have the financial savvy, the basic argument goes, and one brand surely will achieve what many disbursed companies cannot.

Yet the funeral home industry, even after over 50 years of consolidation, remains highly fragmented.  According to AARP, a U.S. interest group whose stated mission is "to empower people to choose how they live as they go," the five largest funeral home chains accounted for 18% of all funerals in the Unites States. The fragmentation is probably related to the emotional aspect of customer preference to deal with local funeral and cemetery homes.

Carriage Services

My curiosity in the funeral business was a coincidence. My attorney and I prepared my living trust last week, while I accidently came across Carriage Services, a funeral home company with $305 million in market capitalization. In 2018, I soon learned, the stock traded as high as $27 and as low as $15. At $16, I bought a few shares.  

There were two reasons in a nut shell. The first reason was that I thought the stock price was below the average value. I defined the average value at 10 to 15 times the trailing year earnings per share. And at $16 per share, Carriage was trading at about 8 times the trailing earnings.

The second reason was that I estimated that a large competitor, such as StoneMor Partners or Service Corporation International, could buy Carriage, at a premium. While there are not many mergers and acquisitions in the funeral business, I was able to find some data to back this hypothesis.


Great businesses that benefit society are not necessarily good investments. The airline industry, for example, has achieved wonders for us over the past 80 years in terms of travel, leisure and trade. Yet the increase in our well-being did not translate to earnings and value for the airline industry investor.

The funeral home investor faces a similar risk. While it is a profoundly humane business to be in, to help and be of service to those who lose a loved one, of blessed memory, the funeral home investor may soon learn what the airline industry investor forgot.

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