Are Death Care investors looking for growth or earnings stability?

March 10, 2023/Finance/

I think the title of this article poses an interesting question. And, I also believe it is one that is not easily answered. I’m writing this article on Monday, March 6, so that is the data that I will use.

I was spurred to write the article when I saw in this Yahoo Finance article that the “Forward Price to Earnings Ratio” (P/E ratio) of the S&P 500 index was at 17.6. . .which is a little higher than where the 10-year average of that ratio has been — which is 17.2. Now, a quick lesson is that the P/E ratio is somewhat indicative of the price, as compared to the earnings of the company, what investors are willing to pay for a stock.

For instance, a stock with a very high P/E ratio indicates that investors believe that stock is poised for earnings growth eventually. In general, a lower P/E ratio indicates that the stock is more “earnings stable” and less growth oriented. That is not always true, but in general terms, pretty much so. Also, many times the S&P 500 is used as a barometer because it measures eleven different sectors of America’s broad economy.

It’s been my assumption that as our economy seems to be wavering on differing subsets of news — strong sales, job layoffs, inflation fighting, rising interest rates — that investors would gravitate to more “stable” investments rather than chase companies with less, or no, profits but high growth potential. I thought that especially so when I noticed just last week I could purchase certificates of deposit paying 5.1% that were FDIC insured. Gravitating to more stable investments would, in my opinion, cause P/E ratios to drop.

So, I then took a look at this chart from Dow Jones that does indicate that the “Forward Price to Earnings Ratio” of the S&P 500 has dropped in one year’s time. It indicates that one-year ago that P/E number was 24.21 compared to Monday’s 17.8.

I then thought it would be interesting to see where the three public Death Care companies that cater to the consumer public were on this measurement scale. It would give us some indication on how the investor public views these three companies — Service Corporation International, Carriage Services, and Park Lawn Corporation.

Here are the forward looking P/E ratios of the Death Care companies as of Monday, March 6:

Service Corporation International — 19.20
Carriage Services — 14.40
Park Lawn Corporation — 29.04

Here are also some forward looking P/E ratios of companies that at one time were considered “high growth” companies:

Netflix — 27.60
Alphabet (Google) — 18.40
Meta (Facebook) — 20.07

So, what is my conclusion? I’m a little bit stumped when I look at some of the historic growth high tech companies with P/E ratios that are now similar to Death Care companies . . . .who have historically been known as “Low-growth” earnings companies. My only conclusion is that investors are a little leery of “potential fast growth” companies at this time and are valuing slow, steady growth companies, with stability, at the same rates as the former high-flyers.

I think the market is saying that, at this particular time, investors are increasingly looking for companies, such as funeral home companies, that can grind out consistent earnings quarter after quarter and year after year. As tech company’s P/E ratios have been lowered there seems to be some contentment, as shown by similar P/E ratios, in the earnings consistency that can be found in Death Care.

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