Carriage Services makes it living…by selling death. No, they don't make or sell cigarettes, but rather, CSV is the 4th largest, publicly traded company in the death care industry (DCI). That is a fancy way of saying they operate funeral homes and cemeteries. Three years ago, CSV was on a borrowing and buying bender of Tyco proportions that became rather grave when the easy money stopped. Fortunately, management has reincarnated themselves into free cash flow disciples as they delever the balance sheet and improve earnings.
Guidance: From the 4th Quarter press release: "Carriage expects revenues for the full year of 2003 to range between $152 million and $157 million, EBITDA to range between $40 million and $43 million, earnings to range between $0.40 to $0.44 per share, and free cash flow from operations to range between $11 million and $14 million."
Book value: While CSV trades at a discount to its $5.64 book value, goodwill is about $10/share, so there is no tangible book net after debt. However, that doesn’t mean that goodwill has no value. Whereas companies like Nike aspire to national brands, funeral homes are very much about the local brand. In fact, CSV previously referred to goodwill as “Names and Reputations” and purposely does not alter the local name. Image is very important in this business, and provides a lead-in to the next item of discussion, capital expenditures.
Cap Ex & Depreciation: It is important that a funeral home and cemetery maintain its image, which includes keeping property and equipment in good repair. During their acquisition days, their cap ex was higher so as to outfit each location with the full array of services offered by CSV. Currently, spending is about $6 million per year in cap ex. This is drastically down from several years ago, but it isn’t bare bones, either. In their 4th Quarter CC, they mentioned that there is room to cut cap ex, if need be, to maintenance levels. Right now, they are selectively making improvements to those operations where they will realize immediate returns. Depreciation is running about $10.5 million per year.
Debt: As of 2/28/03, CSV has roughly $150 million in debt as follows: $33 million on a revolving credit facility, $97 million of senior notes and $20 million of other debt. Management expects that they will end the year with debt at $132-$135 million as they use free cash flow and some selected asset sales to reduce debt. When CSV restructured in 2000, the senior note holders extracted some additional covenants which include limiting acquisitions and any asset dispositions are used to buy back the senior notes. There are 1.875 million shares of 7% mandatory convertible securities due 2029 that are way below their 2.4465 shares @ $20.4375 conversion price. These trade around $30, or a 40% discount to their $50 face value, and have an YTM of 12%.
Total EV is $3.42 X 17.1 million common shares +
$30 X 1.875 million convertible securities +
$149.1 million of debt
$263.8 million total EV
Divided by mid-range 2003 EBITDA estimate $41.5 million and EV/EBITDA is 6.4. Based on a mid-range 2003 EPS estimate of $0.42, CSV is trading at P/E of 8.1.
For a background on the funky funeral accounting that existed prior to 2000, you may want to read another VIC write-up, AWGI. Briefly, CSV and its competitors were rolling up mom-and-pop funeral homes by using easy credit. Lenders were entranced by the steadily rising EPS and did not seem concerned that the revenue sales of preneed funerals and plots could be recognized entirely up front. SAB 101 came out in 2000 and brought some sense to the DCI industry’s accounting. Among other things, SAB 101 forced operators to defer revenue recognition until services and merchandise were delivered. It also stopped the practice of netting preneed assets and liabilities on the asset side. Instead, they must now separate and record the full extent of the liabilities and of the assets.
Preneed Sales & Insurance: SAB 101 effectively forced the death care industry to redo its business model, which had previously focused on preneed sales. Unfortunately, preneed sales are actually an initial cash drain because of promotional costs and the sales commissions paid to staff. In 2000, they closed their national preneed marketing center as part of their “Fresh Start” re-organization. In selected competitive markets, CSV still operates preneed sales, but through existing local staff. Since then, CSV has emphasized the sale of funeral insurance, which is cash flow friendly. One hitch with the insurance sales is that there is a one year refund guarantee, so CSV has taken the conservative step of not recognizing the insurance commissions as revenue for one year. I should note that the preneed sales are recognized as on the balance sheet and initially I was excited that this might be considered a dead man’s float, to mangle a Buffett concept. Alas, regulations require that most preneed monies are put into 3rd party trusts, although they do earn some interest income off these monies.
Trends: There are a number of trends that impact CSV, and most of them are currently negative. One is that mortality rates have decreased as people live longer. To quote Bill Burns of Johnson Rice: "… there is an outbreak of wellness that is adversely affecting these companies." That is mitigated somewhat by the fact that the US population continues to grow. I suppose one could make the case that mortality rates cannot go down forever and that the boomer effect will leave its mark even in this industry. A surprising trend is that their business is seasonal, with the winter months being the busiest. Another trend is the increase in cremations, where the current national average is 27% of funerals are cremations. This is expected to increase by about 1% per year over the next decade. The good news is that cremations have a higher margin, offset by the bad news that a cremation still results in less revenue and bottom-line dollars as compared to a traditional casket funeral. Finally, funerals are not resistant to recessionary times, as people can opt to bury Billy Bob in a plain pine casket instead of the fancy metal casket with Jerry Garcia airbrushed on it. Preneed sales will also be under pressure, as making final arrangements have a lower priority than say, putting food on the table, buying prescriptions, staving off the repo man….
Looking at the recent results and trading of it peer group of AWGI, SRV and STEI, I believe that CSV has been trading down in sympathy. Basically, all them are trying to improve their balance sheets and none of them is in a position to consolidate another.
To counteract these negative trends, management has initiated a special training program, which began with the site managers. The program seeks to establish a level of service that differentiates their stores (yes, that’s how they refer to them, and yes, they do track SSS) by creating an emotional experience that celebrates life. The idea is to focus on the client through caring and compassion. I have to admit that I am skeptical as to the benefits of this program, although that may be partly due to my own jaded view of this industry. After all, I enjoyed both Evelyn Waugh’s ‘The Loved One’ and the Rodney Dangerfield line from ‘Caddyshack’: "Golf courses and cemeteries are the two greatest wastes of prime real estate in America." Anyway, from the CC, management noted that while same-store calls per store where down for 4th Quarter 2002 vs. 4th Quarter 2001, same-store revenues were up, to which they attribute their new program. CSV is now rolling the training out to the store staff. They also indicated that several of their competitors, both independents and chains, have requested this training.
Please see first post.
|Entry||03/10/2003 05:31 AM|
|I don't own this stock, so this is the first time that I have posted an idea at VIC that I did not own or was not actively pursuing, although I am looking at the preferred securities for my mom's account. When CSV first came up on my stock screen, I didn't think much of it until I checked out the SEC documents. What caught my eye was that Richard Strong of Strong Management increased his stake in CSV over December and January, when the stock was over $4, so that he now controls 11.3% of the common shares. This includes shares held in his family partnerships. So I started looking into this company to see what the attraction was. I have yet to find any. The only two strategies that I find mildly interesting is to short the common and buy the preferred securities or to wait in see if this trades to stupid cheap levels of under $2.|
If you look at EV/EBITDA mutliples, CSV's price could be cut in half and the multiple only goes from 6.4 to 5.7. If the equity goes to zero, EV/EBITDA is still a 5 multiple that is neither expensive nor screaming cheap. Assuming FCF remains steady and they use it to pay down debt, which will be a challenge given where they are in their cycle, it will take three years to shave one multiple off.
Given the lack of a catalyst or value floor, my reason for posting this was to solicit opinions from VIC members. Is Richard Strong crazy as a fox, or just crazy? All I ask is that if you rate this idea, I would appreciate hearing why.
Thanks in advance.
|Entry||03/11/2003 09:48 PM|
|Isn't STEI selling at a cheaper multiple? EV/EBITDA of less than 5.5x I think. As you indicate, if you marked CSV to STEI's multiple, you'd be down 50%. You would think CSV should sell at a discount (other things being equal).|
As to STrong, I don't know. Like everybody else, he's not always right. Moreover, insiders were buying this group across the Board- in front of the disappointing Q4 results! Perhaps they were surprised by the weakness in the economy and low death rates?
|Entry||03/12/2003 08:35 AM|
Since all four of the public DCI companies have weak balance sheets at the moment, and given that most of them are selling non-strategic assets to reduce debt, I think EV/EBITDA has less weight here because there is little chance for consolidation or a buyout. STEI trades at $2.70 with projected earnings fo fiscal '03 of $0.32, giving it a P/E of 8.4 - in the same range as CSV. That implies a 12% yield, which is the same yield as CSV's preferred securities.
As to inside buying, they truly believed that 4th Quarter was going to be a blowout to culminate in the end of their successful two year transformation. It looks like October and Novemeber were excellent and then something happened in December that increased expenses, although they did not elaborate on the CC as to what they were.
As to the weirdness of my write-up, I thought I needed an edge to keep readers' attention. Still, the way management refers to same-store-sales creeps me out. Should we be thankful that they don't track repeat customers? It's definitely a bizarre niche.
|Entry||03/13/2003 12:10 AM|
|I agree buyouts in the group are unlikely anytime soon. Looking at EV/EBITDA is nonetheless helpful in comparing names within the group. I believe earnings derived from a sliver of equity deserve a lower multiple than a better capitalized company. CSV is somewhat more leveraged, yet sells at a similar PE and a higher EV/EBITDA ratio despite being a quarter the size. What makes CSV a better choice?|
|Entry||03/13/2003 12:18 PM|
I think the near term prospects for CSV are slightly better than STEI. STEI was cash flow negative in their first quarter results ending January 2003. It also looks like there is a bit of a discount because of their Remarketable Or Redeemable Securities (ROARS). From STEI's financials:
"Management is currently considering recommending to the Board of Directors that the Company redeem the Remarketable Or Redeemable Securities (“ROARS”) as an alternative to allowing them to be remarketed when they mature on May 1, 2003. The forecasts below do not include any impact from the potential redemption of the ROARS. If the ROARS are redeemed, the Company must pay the remarketing dealer an amount equal to the contractually specified value of the remarketing right (the “Calculation Amount”). The Calculation Amount on March 5, 2003 (calculated as if the ROARS were redeemed on March 5, 2003), was $14.8 million. The Calculation Amount on May 1, 2003 will vary based on the then applicable 10-year Treasury rate (which was 3.62 percent at March 5, 2003) as follows:
10-year Treasury Rate Value of Remarketing Right
5.00%______$ 3.4 million
4.50%______$ 7.5 million
If the Company redeems the ROARS and is required to pay the Calculation Amount, interest expense would be increased for fiscal year 2003 by the amount of the Calculation Amount, and the Company would incur a net cash outflow for the after-tax effect of the Calculation Amount."
|Entry||05/07/2003 09:46 PM|
|Finally made a decision to buy this. With an improved macroeconomic view, CSV is cheap. Earnings will be released on Monday.|
|Subject||Do the Tides ever trade?|
|Entry||09/17/2003 04:37 PM|
|I looking at the new projections on the web site it's hard for me to get excited about the common. With all the negative trends I think they'll do well to keep EBITDA flat at 40m. That drops true FCF below 10m/year or about 15% ROI on the 60m market cap.|
At an indicated $25 the Tides sport a current (albeit deferred) yield of 14% and a YTM over 16%. They're a lot safer than the common and will become even more so as senior debt is paid down. The only catch is they seem to be impossible to buy, even in small quantities. Any thoughts on how to buy these suckers?
|Entry||09/22/2003 06:24 AM|
Sorry for the delay. Was on vacation.
I haven't tried to buy the Tides, so not much help there. After seeing that management started deferring interest payments on the Tides, I baled out. Combine that with the likelihood that the Tides will have to be treated as debt, and the common looks like an expensive option for a rising death rate.
My only caution on buying the Tides is that the senior debtholders hold most of the cards here. They have a bunch of covenants that they can inforce, and I suspect one or more covenants may be triggered if the Tides factor into debt ratios.