You only have to read the first page of Carriage Service’s press release, which you can read here, to understand that CEO Mel Payne was not thrilled with Carriage’s 2nd quarter numbers.  The third paragraph of the release states, “We have complete confidence that our operating leadership is effectively dealing with the revenue and margin challenges in our funeral portfolio and that we will experience broadly higher performance during the latter part of the second half of the year compared to our second quarter.”

Last week it was announced that Carriage’s earnings per share for the 2Q of 2018 were $0.22 whereas analysts expected them to be more like about $0.37 per share.  For the 2nd quarter of 2017 the comparable basic earnings per share were $0.33, so the comparable earnings were off about a third.  Following the earnings report, Carriage Services stock lost about 5% of its market value.

We realize that it is only one quarter of missed earnings and that the ship certainly can be righted and we expect that management of Carriage Services will work toward that end.  To that end we are going to concentrate our points on three subjects that over the last 30 years I have seen with public acquisition companies and what it means for the challenges going forward for Carriage and companies like them.

1. Raising Top-Line Revenue and its Mirage
2. Funeral Volume
3. Acquisition Costs and Overhead

Raising Top Line Revenue – Carriage’s report is disconcerting to us in that for 2Q 2018 top-line revenue was negligibly lower even when it counts acquisition revenue and its acquisition revenue was up over 24% from 2017 acquisitions.  That points out a negative trend that includes “Same-Store” revenues  down almost 5%.  Generally, acquisition companies show a trending increase in “Top-Line” revenue simply because of acquisitions.  We know, however, that a if you only focus on the growing “Top-Line” revenue it can mask problems about falling revenue per case or increased debt service because of higher priced acquisitions.  This is the “mirage” I have seen since the days of The Loewen Group.  As an investor, only watching “growing” top-line growth thru acquisitions can be a mistake as it disguises operational and/or debt issues.  Finally, it is our opinion that whenever you have lower revenues in the death care industry, as Carriage did with operating revenues on the funeral side last quarter, that could show the tip of the iceberg for future problems.

Funeral Volume– In Carriage’s report they show “Same Store” funeral volumes dropped over 2% for the quarter.  While losing volume at first for an acquisition funeral home is somewhat common depending on the competitors in the market,  I don’t think that has always been true of Carriage Services.  Volume loss, especially when coupled with a revenue per case decline, can make for a tough business environment.  We expect Carriage needs to remedy this item.

Acquisition Costs and Overhead – As we’ve said before we think Carriage is very strategic in their acquisitions as they look for cluster areas with growing populations.  They do need to be careful however, not to overpay for the firms they are acquiring.  Moving forward in this environment of less traditional funerals and more direct cremations — you cannot be successful by getting caught paying for historical numbers of traditional funerals and then have those numbers quite rapidly move to direct cremations.

Finally, if I’ve learned anything over my time following public companies, there are always differing opinions on what is going to happen going forward.  You can read here that last Thursday, Barrington Research put a “Buy” opinion on Carriage Services stock which I surmise means they certainly believe that this quarter’s earnings report for the company is a one-time occurrence.

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