CIBC Increase TargetHave always been near the low end of the spectrum (target wise) but at least we're moving in the right direction. GLTA
EQUITY RESEARCH
November 10, 2022 Earnings Update
PARK LAWN CORP.
Resurrection From Q2 Adds Optimism; Conditions Still
Challenging
Our Conclusion
Park Lawn posted sound results in a somewhat difficult market. As
importantly, the pace of M&A has continued, and we expect there’s likely
more to come. Even with PLC seemingly taking share, we expect this
industry will be challenged for the next couple quarters because of the
declining death rate and what we expect will be a more difficult environment for pre-need sales. We maintain our Neutral rating, and increase our price target to $27 (previously $25) on a higher 2023E EBITDA.
Key Points
Organic Growth Likely Challenged Until Mid-2023. All death care
businesses are likely to face challenging comparisons from the year prior.
Average weekly deaths in the U.S. were ~69K in Q4/21; in Q4/22 to date, the figure is 30% lower. Even if PLC continues to outperform the industry, the unique circumstances of 2020 & 2021 make it difficult for PLC to grow
organically in the next few quarters.
Pre-need Services Could Also Be Suppressed. We continue to believe
that worries about recession, and also fatigued customers looking to focus away from the topic of death, will limit growth in pre-need sales which are needed to offset the more normalized mortality rate. A large-ticket purchase like this appears highly deferrable, in our view. That said, historical performance seems to suggest this is a consumer spending item that could rebound quickly if conditions improve.
Solid Q/Q Margin Expansion, But Inflationary Pressures On The Way.
EBITDA margin rebounded to 22.4% after a difficult Q2 (20.6%), partly a
product of price increases passed through. However, management disclosed today that inflationary pressures are likely to be felt in a variety of areas (labour, utilities and other) in the coming quarters, and investments in different areas like IT and other corporate initiatives will be incurred over the next few quarters.
M&A Story Remains Intact, Even If More Costly. We believe M&A
opportunities remain attractive. Competition from public players is significant, albeit seemingly no different than usual. Meanwhile, management commented today that private equity players have backed off somewhat for the time-being. This is one benefit of higher interest rates, in our view. On the other hand, most of PLC’s debt is variable-rate: we estimate that every 100 bps move in interest rates reduces EPS by ~3%. Still, leverage at 2.2x our NTM EBITDA estimate provides for plenty of deals.