Stifel Seeing the death care industry as “appealing” and potentially lucrative for investors, Stifel analyst Martin Landry resumed coverage of Park Lawn Corp. with a “buy” recommendation, seeing “significant growth potential.”
“PLC is a consolidator of the fragmented North American death care industry,” he said in a research report. “The death care industry offers interesting characteristics such as stable growth, high margins, and barriers to entry. PLC is managed by an experienced team with strong industry roots and a successful track record. The industry is faced with succession issues, which creates strong underlying consolidation trends for several years ahead.”
Mr. Landry said the Toronto-based company, which operates 144 cemeteries and 167 funeral homes across three Canadian provinces and 18 U.S. states, has the potential to see earnings per share grow at a compound annual growth rate of more than 20 per cent through 2026, pointing to 3-4-per-cent organic growth and “a strong M&A pipeline.”
“Given Park Lawn’s reliance on equity financing to fund its acquisitions, the company’s EPS CAGR of 13 per cent since 2016 has lagged revenue growth,” he said. “Moving forward, given our view that PLC will likely increase its reliance on debt to finance its acquisitions, we would expect EPS growth to better align with revenue growth. PLC’s EPS CAGR since 2016 compares favorably to Carriage Services Inc. (CSV) at 8 per cent, but has historically lagged Service Corporation International (SCI) at 20 per cent.”
“Our analysis suggests that Park Lawn can deploy $100 million per year on M&A until 2026 while maintaining a sub 3.5 times net debt to EBITDA ratio, and finance acquisitions with internally generated funds and debt without requiring equity. According to our analysis, despite no equity issuance, the company would not breach its financial covenants of 3.75 times debt/EBITDA. According to our analysis, in order to reach its $2.00 per share target by 2026, Park Lawn’s EBITDA margins would have to increase by 300bps from 2022 levels of 23 per cent. Industry peers generate EBITDA margins higher than 30 per cent, which gives us confidence that margin expansion is likely for PLC. In addition, management seems confident in their ability to expand margins from 2022 levels. However, it will require a strong execution which adds a level of risk to achieving the $2.00 EPS target.”
Mr. Landry did point to several investment risks, including the rising cost of capital have the potential to slow M&A activity, a slowing of the death rate following the COVID pandemic spike and “changing social practice” leading to an increased penetration of direct cremation.
However, he thinks Park Lawn now has a “reasonable” valuation to attract investors.
“Despite Park Lawn’s shares having rebounded from its October lows, the current valuation offers a good entry point for long-term investors, in our view,” he said. “PLC’s valuation is appealing at 17 times forward earnings, roughly five multiple points lower than the company’s 5-year average of 22 times. This valuation erosion is larger than peers SCI and CSV which are trading at 3.75 times and 1.5 times lower than their respective 5- year forward P/E averages. In our view, the larger erosion experienced by Park Lawn reflects the potential impact of rising interest rates on the company’s business model, which is tilted more towards acquisitions. However, at $28.38, PLC’s shares are off 32 per cent from their all-time high of $41.55 on November 19, 2021, while the company’s long-term earnings power remains unchanged.”
The analyst set a target of $34 per share. The average target on the Street is $35.75.