Revised Targets In the wake of its third-quarter earnings per share falling short of the Street’s expectations,Park Lawn Corp.’s “depressed” valuation offers investors an “attractive entry point,” according to Stifel analyst Martin Landry.
“U.S. mortality rates continue to decline year-over-year and weigh on PLC’s funeral call volumes (down 5 per cent year-over-year) and at-need property sale,” he said. “The COVID overhang on mortality rates appears longer than expected and management expect death rates to decline low-single-digits in 2024. While these results are not encouraging, Park Lawn’s valuation at 8 times EV/EBITDA is not demanding, supported by the 8 times EV/EBITDA multiple received for the divestiture of lower-margin assets. We expect M&A activity to pick up next year as the acquisition pipeline appears healthy and valuation multiples return to normalize levels.”
After the bell on Thursday, the Toronto-based operator of funeral homes and cemeteries reported revenue of $87.5-million, up 8 per cent year-over-year and in line with both Mr. Landry’s $86-million estimate and the consensus projection of $87-billion. However, earnings per share slid 31 per cent to 15 cents per share, missing expectations (19 cents and 21 cents, respectively) due to higher finance costs and tx rate consequences.
“In October, PLC announced the divestiture of 72 cemeteries and 11 funeral homes, which do not fit the company’s long-term goals anymore,” said Mr. Landry. “This will create near-term noise in Park Lawn’s financial results but should allow the company to build off a stronger base, in our view. This should translate into improvements in PLC’s financial performance starting with a higher and more stable margin profile. Additionally, the implementation of FaCTS [a new funeral and cemetery technology solution] should continue to enable significant margin benefits as visibility on field margins improves, enabling management to better manage KPIs on a rooftop by rooftop basis.
“Clear focus on high return on investments. Recent decisions made by management such as asset divestitures and the cancelation of a cemetery development project, suggests a stronger focus on ROIC [return on invested capital]. We would expect to see PLC’s depressed ROIC increase over time as management redeploys capital into high ROIC initiatives. Internal ROIC threshold targets are mid-to-high teens vs. the current ROIC level of mid-single-digits.”
Citing the weaker-than-expected results as well as rising interest payments as a result of increased effective interest rates and higher debt levels, Mr. Landry reduced his 2023 EPS estimate by 7 per cent to 82 cents from 88 cents. His 2024 projection is now 80 cents, down from 96 cents previously, while he introduced a 2025 expectation of 86 cents.
Maintaining a “buy” recommendation for Park Lawn shares, Mr. Landry dropped his target to $22 from $30. The average target on the Street is $25.50.
Elsewhere, others making changes include:
* Scotia’s George Doumet to $24 from $28 with a “sector outperform” rating.
“Q3 adj. EBITDA missed expectations, driven by lower revenue from comparable operations (in cemetery) and lower EBITDA margins,” he said. “Looking ahead, while recent moves (step up in corporate G&A and divestiture of lower-margin businesses) have a dilutive impact on estimates, we believe they are the right moves to better position the business to increase efficiencies and balance sheet optionality. From a stock perspective, we can argue that shares are undervalued (trading at approximately 1.5 times discount to SCI vs. historically closer to 0.5 times discount), and anticipate a strong recovery once we gain more visibility around the extent/scope of the normalization of the death rate. PLC remains a preferred small-cap idea.”
* Acumen Capital’s Jim Byrne to $24 from $28 with a “buy” rating.
“Margins will remain under pressure in the near term as the market ‘normalizes’ and the company optimizes both their remaining asset base, and their corporate cost structure,” he said. “With improved financial flexibility following the close of the disposition we anticipate further M&A and evidence of improved margins will renew investor interest.”
* CIBC’s John Zamparo to $20 from $23.50 with a “neutral” rating.