Description

TLDR:

Carriage Services is a leading deathcare services platform that owns and operates a portfolio of funeral homes, cemeteries and cremation facilities across the U.S., and has been written in VIC twice (the last time in 2018, hence a refresh). Would encourage a read of zbeex’s writeup for more background on the company and industry.

We believe that Carriage Services is undergoing a sale process initiated by Park Lawn, a publicly-listed Canadian player, who bid an all cash $34 a share. CSV is currently trading below the bid.

Even if the deal breaks, Carriage Services is a quality company trading cheaply, at a normalized FCF yield of ~8% and EV/current EBITDA at 10x.

Carriage Services has had a strong record of revenue and EBITDA growth, with 2013-2022 seeing EBITDA growth at 8% CAGR.

Business Overview

Carriage Services has 3 complementary business segments including Funeral Home, Cemetery and Preneed that offer a spectrum of deathcare services.

Funeral Home (70% Revenue / EBITDA) provides burial, cremation and funeral planning services. Cemetery (30% Revenue / EBITDA)

The 3^rd segment is Preeneed Trust, which is a balance sheet business, essentially allowing customers to pre-plan and pre-pay for funeral and cemetery service, with the proceeds from the preneed sales placed into an investment trust, with the gains/losses being booked as a profit or loss. As of this year it has $200M in the trust, generating about $50M of net cap gains since 2020.

Investment Thesis:

• Predictable and accelerating growth:
  • In the next 20 years, the U.S. population aged 65 is expected to double to 80M. As a result, future deathcare services expected to exceed 4 million deaths annually by 2045, which represents an increase of ~45% over 2019 deaths of ~3 million
  • They have a diverse national footprint, but important to note that Carriage Services is well positioned in the deathcare industry, with the biggest footprint in the sates with the largest and fastest growing 75+ populations, including CA, FL, TX, NY, AZ and GA.
• One of a handful of consolidators in a fragmented market, with material runway to build scale via accretive M&A:
  • The industry remains fragmented, with 80% of the industry revenues still generated by independent operators. Carriage Services is about the #4-5 player in the space, a distant 205 locations behind the ~2K of Service Corp, but quite evenly matched against the number 2-4^th players. Many independent mom and pop players are undergoing generational change and estate planning, increasing rollup opportunities.
  • This is an industry that lends itself to rollups, prime example being Service Corp which has been able to realize ~20% of revenue synergies. Apart from the obvious back office synergies, this is an industry where scale efficiencies matter, e.g. being able to acquire the underlying real estate for future funeral homes and standardize pricing for funeral necessities.
  • Carriage Services has been very disciplined in acquiring businesses, with multiples post-synergies at around 5-6x EBITDA.
• High quality company:
  • There are only 2 things certain in life. One of them is, unfortunately, death. Deathcare is obviously an essential service and recession resilient
  • Because it is such a critical event, local franchises have very strong customer relationships with families resulting in strong pricing power
  • When combined with high operating leverage, the secular volume growth as discussed above would see very strong incremental margins of 60-70%.
• Secular shift towards cremation vs. burials an overblown risk
  • Cremation is a higher margin service albeit at meaningfully lower pricing, although this is a headwind that has been around for many years, and Carriage Services’ ability to increase prices and cross sell different services have allowed them to maintain and even grow margins

Deal Process

In July, Park Lawn, Park Lawn, a publicly-listed Canadian competitor, placed and unsolicited bid for CSV at $34.00 per share, which is a 25% premium to the unaffected share price. This was in response to a failed succession planning at CSV to replace then CEO Melvin Payne aged 79, who is the founder. We expect that this is part of his “final” transition to retirement, and our diligence indicates that Carriage Service is likely in a process / “strategic review” catalyzed by this bid.

We think there is minimal anti-trust/HSR risk because pro forma for the merger would mean a player in the U.S. goes from 12% to 14% market share.

For these reasons, we don’t think a deal isn’t likely to go through.

What is the downside? At 10x EBITDA and 12x FCF with a GDP plus grower with meaningful scale economics with growth while having asset level EBITDA margins at 43% (and incremental margins >60%) and group level EBITDA margins at 28%, I think our downside protection is pretty strong with the obvious juicy IRR should a deal go through. Even on a relative value basis, SCI trades at a mammoth 2x turns more than CSV with fewer opportunities for growth, as SCI is already tapped out from an anti-trust perspective in many states.

Risks:

• Covid has pulled forward significant demand; boomer not expected to kick in until 2030s

Catalyst

Deal with Park Lawn or another strategic goes through

Continued growth with secular industry tailwinds and accretive M&A

Guidance for 2024 highlighting undervaluation on a fundamental basis and relative to SCI and other peers