Park Lawn Corporation
Essence of defense: Defensive consumer growth idea for turbulent times
Our view: Meetings today with PLC management reinforce our constructive view of both the industry and PLC’s position within it, underpinned by the early stages of a long-term demographic tailwind and favourable M&A backdrop. With the broad sell-off in high growth, high-multiple SMID cap names, current valuation is highly compelling, in our view, for this defensive, staple-like, consumer-focused growth story with demonstrated resilience through economic cycles. Reiterating OP rating, $54 price target.
Key points:
Defensive growth at reasonable price – valuation compelling, relative to historical range, peers and the broader market. Stock currently trading at 18.9x NTM consensus EPS, almost two standard deviations below the five-year average (Ex. 5), and at the low-end of the range relative to SCI, and both staples and discretionary indices (Ex. 6). In our view, moderating valuation reflects: i) flow of funds against the backdrop of rising rates, inflation and related impact on consumer spending, ii) recent pace of M&A, and iii) muddled visibility as death rates normalize.
Despite Q-to-Q performance that will be impacted by ebb and flow of regional death rates and cadence of M&A, we reiterate our favourable long term view and recommend investors benchmark valuation against broader attributes, namely: i) defensive, relatively inelastic demand, ii) demonstrated resilience through downturns, iii) demographic tailwind, and iv) industry fragmentation with succession challenges. We have strong conviction in management ability to achieve 2026 target EBITDA US$150 MM, with upside to our forecasts if average annual M&A comes in toward the middle or high end of the target range US$75-125 MM. PLC is featured in the RBC CM Small Cap Conviction List.
Management meetings highlights: 1) Inelastic demand through cycles.
Notwithstanding gathering headwinds on consumer spending trends, evidence from 2008-09 recession suggests demand for death care services is highly inelastic, with pre-need demand actually accelerating as older cohorts turn to pre-arrangements to provide peace of mind to loved ones.
2) Inflation manageable, not expected to erode margins. Key challenge is at Houston corporate office where wages and competition for talent butt up against a red-hot O&G market. Field inflation is manageable, with good COGS pass through (inelastic), pricing power (below peers in 65% of markets) to offset gas and utilities, and contract-based procurement. Monuments supply chain is improving and should normalize as of Q3.
3) Leveraging FCF to fund M&A, which should improve ROIC. Strong focus on core competency (operations) and combination of accelerating FCF, clean balance sheet, benefits of FaCTS rollout and prudent M&A should improve returns. We have long-term ROIC trending >10%, ROE >15%.