Raised Targets After “a clean beat” in the fourth quarter of 2022, National Bank Financial analyst Zachary Evershed warns Park Lawn Corp. now faces a “challenging comparable period,” but the Toronto-based funeral home operator is “executing on pre-need sales like it’s 2019.”
“As the COVID-19 trigger effect has mostly waned, management notes a return to a pre-pandemic operating environment for pre-need sales,” he said. “In order to drive growth and ensure the sales force is aligned with the company’s objectives, Park Lawn has moved seasoned M&A team member Bill Hudson to SVP Sales.”
“Given the stiff year-over-year organic growth headwind Park Lawn faces in Q1/23 due to a robust comparable period, management expects 2023 volumes to be down low-single digit, offset by slight pricing improvements year-over-year and mid-single digit cemetery growth. This aligns with our forecast of 0.4-per-cent organic growth in 2023, with the largest decline in the first quarter (down 11.9 per cent year-over-year). We forecast gradual margin improvements through the year, also in line with management commentary, yielding margin expansion of 120 basis points year-over-year in 2023.”
Shares of Park Lawn jumped 8.6 per cent on Friday after it revenue of $86.1-million, up 9.1 per cent year-over-year and above the Street’s expectation of $84.8-million. Adjusted earnings per share slid 19.7 per cent to 24 cents, beating the consensus by 2 estimate cents.
“We view the beat in Q4 especially positively as it demonstrates simultaneously that PLC’s organic growth can outperform the broader vagaries in death rates (down 11.7 per cent in PLC’s geographies), and that the company’s margins, while down 230 basis points year-over-yeary from a tough comp, are up 60 basis points quarter-over-quarter and expanded beyond pre-pandemic levels (22.5 per cent) without the benefit of excess COVID-19 deaths,” said Mr. Evershed. “With the pre-need sales lever to be supported by onsite projects and inventory buildouts, positive organic growth should be back on the menu as soon as Q2/23, with upside built on top of demographic volume drivers.”
“COVID-19 deaths in the U.S. remain in a mostly steady endemic state and notwithstanding any surprise outbreaks rapidly spiking March death tolls, Park Lawn will face another difficult volume comp in Q1/23. Should COVID-19 related deaths continue at a cadence of 400-500 deaths daily, we estimate a volume headwind of approximately 15 per cent in Q1/23.”
Seeing Park Lawn adding flexibility with a new $60-million tranche on its credit facility, Mr. Evershed expects it to reach its goal of $75-125-million in annual acquisition spending “fairly easily given management’s bullish tone and the increased flexibility offered by additional borrowing capacity.”
With “minor upward estimate revisions” to his forecast, he raised his target for Park Lawn shares to $32.50 from $32, reiterating an “outperform” rating. The average is $35.75.
Others making changes include:
* Scotia Capital’s George Doumet to $33.50 from $32 with a “sector outperform” rating.
* CIBC’s John Zamparo to $30 from $28 with a “neutral” rating.