Finance

Is it time to buy funeral home stocks?

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Earlier this week I read this article from Yahoo Finance authored by Brian Sozzi.  The article is entitled “Consumers have to face that nasty inflation is here to stay for awhile”.

The article goes on to mention that, at least in Mr. Sozzi’s opinion, skilled workers are too few in number to meet the needs of post-pandemic businesses and that is leading to wage inflation.  He doesn’t see a stop to that phenomena in the short term and for that reason, and some others, he believes that inflation will be with us for awhile.

Lending credibility to Sozzi’s opinion, Jefferies Chief Economist Aneta Markowska recently sent this note to her clients:

“The tightness in the labor market is allowing labor to extract concessions on wages, bonuses and benefits, causing labor costs to ‘chase’ prices higher. This will make it difficult for inflation to decelerate significantly from here as businesses now have to pass higher costs back to consumers in order to preserve margins.

Meanwhile, ample cash and borrowing capacity is allowing consumers to absorb higher prices despite negative real wages, which sustains the positive feedback loop.”

We can all do what we have to, or prefer to do, with our spending habits. . . for instance, eating out less often to save money.  Or driving less to save money. . . or buying generic products to save money.  Those are options that we all have.  The article also questions the other side of money management to spending. . .that is saving and investing.

Charles Schwab chief investment strategist Liz Ann Sonders is quoted in the article about the investment side as saying this, “. . .you want to have a quality wrapper around the types of stocks you’re looking at. I think the factors that have been doing well and I think will continue to do well — which have this sort of quality wrapper around them — would be areas like strong free cash flow yield given what we are seeing in inflation rates, cash rich balance sheets and profitability. This is not the time to go into very long duration companies that have no earnings and prospects for earnings.”

When I read that I immediately thought of the death care industry and the public stocks that are in the funeral care, cremation care, and cemetery business.  Those business, just like the individual funeral homes of family operators, deal with a commodity, death, that does not rise and fall due to the whims of the clientele.  The business generally moves in a slow, steady gain of clientele as population gains in numbers and age.

Traditional funeral homes generally have strong cash-flow as do the public companies in the business.  They – the public companies – historically use that cash-flow for growth by acquisitions, to buy back stock, or to decrease debt.  The North American public companies in that business realm — Service Corporation International, Carriage Services, and Park Lawn Corporation — all will have those options as long as they bring forth excess operating cash-flow.

Tom Anderson
Funeral Director Daily

Yes, there is a down-side to investment in death care companies.  For instance, how much in debt do they owe? . . . and if interest rates rise those debt payments will eat into that positive cash-flow.  And, what about their own internal cost structures and pressures? . . . . .will those companies be able to fend off huge wage increases because if they do have their cost structures get out of whack they could suffer the equivalent of generic consumer purchases  ? . . . that is death care client families choosing much less services than they anticipated to simply save cost.  For instance, a prolonged and highly inflated price period could lead to large gains in the Direct Cremation market which would lower revenues for traditional funeral homes at the same time costs (such as wages) are increasing.  That would be a bad formula for funeral home companies.

There’s lots of things you can do with your savings.  You can put it under your mattress. . . or you can put it into low-interest certificates of deposits.  Each of us is different and each of us has different tolerances of what we can be comfortable with.  However, while not a certainty for gains, the death care business seems to have many of the traits that may make many of us comfortable commensurate with the risk that we take in an inflationary environment.

As you look for areas to invest. . . check out the death care options.  You might conclude, as some have despite the aforementioned possible downsides, they are a pretty good port in a storm.

Disclaimer— The author of this article holds stock positions in Service Corporation International and Park Lawn Corporation.

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