Friday, 6 March 2015

Death as an investment theme #2: Service Corp

Following on from my review of Dignity the UK's largest funeral service and related provider (link here) now it is the turn for part two.  As discussed in the Dignity note this has been a strong investment theme during the last few years for obvious demographic reasons:

Service Corp (the largest North American funeral services company)... 

...has been a strong performer within this theme generating strong and improving free cash flows.  Here’s a problem however. Due to the onset of tax payments now this improvement is now prospectively coming to an end: 

And this contributes to a worsening in the headline EPS growth rate albeit that an 10% anticipated headline growth rate (18% underlying pre acquisition impact) is still very presentable:

Despite this headline free cash flow level reduction in 2015 the company is still able to apply a little under half of its free cash flow to buybacks which is good but at a x4 net debt:ebitda ratio implies that it would take around 12 years to pay down debt if they applied ALL non-acquisitions cash flows to it. However in hard numbers the c. 6.5% free cash flow yield around 4.5% per annum is coming back to shareholders via a combination of the buyback and the dividend.  You cannot argue with that.  

Thoughts?  Prospectively a x12-13 EV/ebit for such a growth profile still looks attractive.  Of course there are risks with leverage or even with an underlying back book (and associated financial products required to underpin this).

The share has performed well over the last year but on the basis of the above there is more to come.  I would be happy valuing the stock up to a x14 EV/ebit multiple which gives a forward target of around US$28.  Interesting.  

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