Who Might the Buyers Be

So, as Monday afternoon churned into our New Year’s Eve revelry we did get to see the equity markets take a final upturn, but for the year we saw the Dow Jones average lose 5.6%, the Nasdaq lose 3.9%, and the S & P 500 lose 6.2% of its value.  All in all, the major equity markets in the USA took their biggest yearly loss in the last ten years.

An interesting exercise for me has always been to look at the death care public companies and see what the sentiment of the investing public was as compared to the sentiment of the investing public in the common indexes.  For the largest three public death care operators in the United States it is fairly easy to see that the investing world liked what was happening at Service Corporation International and showed some reservations on the operations of StoneMor Partners and Carriage Services during 2018.  For the record, SCI was one of those companies that swam against the tide and posted a positive gain of about 7% in its stock price.  The company now has a market capitalization of almost $7.3 billion.  SCI has about 1,972 properties so they have an average property market cap value of about  $3.6 million. (Market Cap/Properties)

On the other hand, the second largest public company by revenue, StoneMor Partners, has continued to be plagued by an eroding market cap value as evidenced by its declining stock price.  The company started 2018 with a market cap of about $250 million and ended 2018 with a market capitalization value of about $86 million as investors cut the stock price from $6.56 to a year end close of $2.25 Monday.  In essence stock buyers, or sellers, eroded about $164 million of perceived value off of the company in 2018.  With 413 properties (funeral home and cemeteries) and a market cap of about $86 million, the average StoneMor property is valued at $208,000. (Market Cap/Properties)

And finally, Carriage Services saw a slippage in the confidence in their stock price due partly to a missed earnings report in their 3rd Quarter.  Carriage started the year with a stock price of $25.75 and ended the year at $15.50 per share. . . that’s a decline of about 40% to the company’s perceived value.  The market cap of Carriage Services (stock price times number of shares of stock outstanding) sits right at about $298 million at the end of the year, down from the beginning of the year when it was at about $494 million.  They list having 213 death care properties so their average property market cap sits at about $1.4 million per property.

My only reason in doing this little exercise is to show you that in my opinion, according to what has been traditional values of death care properties, it appears that the values on StoneMor and Carriage Services properties are really at the low end of a spectrum right now.  I believe that interest rates, while in a general going up mode, are in a pause situation at this time.  So, if there was a reason for anybody to want to take a run at a friendly or non-friendly (hostile) acquisition of one of these companies, I don’t believe that in the last decade the time has ever been more ripe than right now for that to happen.

On the other hand, I’ve always believed that the value of a funeral property is only the cash-flow it can generate over time and if these companies stock prices are down because they are not generating sufficient cash-flow, why would someone want to buy them?  There could be strategic reasons or savings thru consolidations, and there is a lot more to it than this simplistic approach.  And on the sellers side there are value arguments about strategic property versus debt and debt service.  However, just as food for thought, this is where our exercise goes.

So, from my point of view, who are potential death care companies that may be looking to acquire properties and grow to the next level?  StoneMor has properties that sit in the general geographic range on the East Coast, Mid-Atlantic, and Great Lakes area that may be appealing to Canadian operator Park Lawn Corporation.  From the perspective of a buyer for some or all of Carriage properties, I would look to Texas based operators Legacy Funeral Group or NorthStar Memorial Group.  They operate out of the same general geographic regions as many of the Carriage properties.  And, of course, never rule SCI out for anything.


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