Description
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
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$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.
Catalyst
Please see first post.