Canadian Small-cap Model Portfolio
Consumer Discretionary
We are adding a position in Park Lawn Corp. (PLC-T) at 3.0%.
After falling nearly 38% last year on declining earnings, Park Lawn posted better- than-expected Q4/F22 results earlier this month. An earnings beat of $0.33 versus $0.31 expected led to a positive turn of 5.6% in 2023 consensus earnings, which had been previously lowered more than 26% over the past year (Exhibit 1). However, revisions were mixed, as the 2024 consensus moved lower by 5.4%. A potential positive to these combined revisions is that year-over-year EPS growth expectations have narrowed to 15.9% from 29.8% previously. Given the positive momentum we are now witnessing in 2023 estimates, reduced growth expectations could lead to upward revisions to 2024 estimates in the coming quarters, in our view.
The positive inflection in earnings momentum (2023 estimates revised higher) has contributed to Park Lawn's rise in its 12-month forward consensus earnings estimate to $1.57 from the November low of $1.45 (+8.3%, Exhibit 2). With forward earnings now rising, the year-over-year change turned less negative this month (i.e. positive second derivative). Along with the bottoming in share price that has also developed, we see similarities between today and the 2020 earnings recovery in which Park Lawn rallied up to over $40 (Exhibit 3). At 17.3x, Park Lawn is trading below its 2020 forward P/E low of 17.8x and almost two standard deviations below its median of 22.8x (Exhibit 4). Revenue growth, which had stalled over the past several quarters, also jumped 18% year-over-year on Q4/F22 results (Exhibit 5).
Reinforcing our views above is the improving technical backdrop for Park Lawn, which, since November, continues to build support around its 50-day moving average (Exhibit 6). Following the pullback in share price over the past week, along with what we consider to be a less economically sensitive consumer name in what is becoming a highly volatile market, we are adding Park Lawn to our small-cap portfolio at 3.0%.