Into earnings season. . . what can we expect?
We’ve now moved into the 3rd Quarter of 2020 and, needless to say, it has been a different year. I recently read an article from Barrons.com that put the year into perspective and also asked famed stock prognosticator Mario Gabelli to comment on where we are going from here. Gabelli is the Founder, Chairman, and CEO of Gabelli Asset Management.
On the backdrop of this article I thought I would give my perspective on what we might see from the Death Care industry and their reports from the April thru June period. Death care public stocks are scheduled to report April thru June results in the next couple of weeks, starting with Service Corporation International on July 27 through Park Lawn Corporation on August 14.
First of all, the article from Barrons.com was written by Lauren R. Rublin and, to set our perspective, here is the first paragraph:
“Long ago, in a kingdom far away, people zoomed around in fancy sports cars, wore masks on Halloween, and worried that the national budget deficit would spell the ruin of America as we knew it. Today, we Zoom on laptops, wear masks every day, and pay no attention to the deficit, which reached a staggering $2.7 trillion in the first nine months of our government’s current fiscal year.”
Gabelli, in his commentary in the article says, “The economy faces several speed bumps. . . . And, what happens when certain government stimulus programs expire at the end of July? Second quarter earnings are likely to be disastrous.”
Gabelli continues saying, “Corporate earnings will look better in 2021, but gross profit margins will narrow. Wages and regulatory costs tied to health care will rise, as will other costs. . . . .I expect to see a lot more mergers, some facilitated by special purpose acquisition companies or private equity, or corporations looking to grow.”
As to Death Care let’s take a look at what we know as of now. America came into the year looking at a predicted number of around 2.8 million
deaths for the year. COVID-19 has claimed about 130,000 lives to date ( about 1/2 of the year) which I consider premature deaths and add on top of that predicted 2.8 million deaths. Double the half year COVID death total to about 260,000 annual deaths and you come up with an expected death total of 3.o6 million deaths in America for 2020. . . .about a 9.5% increase over the predicted number.
If that is the case, it would seem to be a good year for death care companies, right? Not necessarily so. If you understand how death care works and the COVID rules about funeral gatherings that have been implemented you would understand how this almost 10% increase in deaths may be financially crushing the death care industry.
Why is that? As I explain to my friends you have to understand that there is really two components of how a funeral home charges for its services. One area of service is that portion where the funeral home takes care of the dead human body — cremation, burial, etc. The second portion of charges is that portion where the funeral home cares for the living — through visitations, funeral services, celebrations, and receptions.
To understand what is happening in the COVID-19 world of death care is that you have to understand that the funeral businesses are still busy and charging for taking care of the deceased, however, their services for taking care of the living have been greatly curtailed due to the government imposed rules towards gathering.
The public companies were hit with these gathering rules for only the last two weeks of the January thru March quarter and a couple of CEO’s mentioned that their revenues in that time period decreased from 4-10% per service. Some private firms have indicated revenue decreases of much higher percentages than that. So, it will be interesting to see where those numbers come in for this latest quarter.
It’s also interesting to note that even though my figures indicate that there may be a 9.5-10% increase in death numbers, those numbers will in no way be equally distributed across North America. As we know, there have been major “hotspots” of deaths in major metropolitan areas while rural America has had relatively few COVID-19 deaths. However, even where there have not been great numbers of COVID-19 deaths, those funeral homes still fall under the gathering rules and will receive, in my opinion, less revenue per case on their normal number of cases.
So, here is an optimistic view of what I think could happen. Companies like Service Corporation International (SCI) and Park Lawn Corporation (PLC) could actually see an increase in total revenue as compared to 2Q 2019 because of increased death numbers. And, PLC should show increases simply because it now has more funeral homes reporting, however, I would guess both firms will show a decrease in revenue per case. . . both in same store and total volumes.
A company like Carriage Services, which I believe has lower volume funeral homes and more suburban and rural funeral homes, may actually show a decrease in sales volume . . . especially in the same store category. . as they simply, in my opinion, will not have the uptick in deaths that large metropolitan funeral homes will have to counterbalance the decrease in visitation, celebration, and funeral charges. They may, however, show an increase in total sales, simply because of their large acquisitions that were not part of the 2Q 2019 numbers.
Finally, it will be interesting to see what the cremation rate has done as it pertains to these firms and COVID-19 deaths. It is my opinion, and there has been some reporting, that cremation rates have ticked up more than usual simply because families cannot have traditional large gathering services. We may get some indication of that in the quarterly reports.
So, while like other companies, death care companies have some challenges with life in the COVID world, Rublin writes in his article, and I believe this would pertain to death care companies as well as other companies, “. . .(investment) experts are looking for companies that have used today’s dislocation to fortify and improve their businesses, with the aim of emerging stronger on the other side (of the COVID world).”
Disclaimer — The author holds stock positions in Service Corporation International and Park Lawn Corporation.
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