The Zacks Funeral Services industry participants have been benefiting from higher demand stemming from the indiscriminate coronavirus spread that has claimed a thousand lives. Rise in the number of deaths has been driving demand for products and services of the industry players. However, social-distancing trends amid the pandemic have limited funeral size and scope, thereby hurting revenue per service performed. Also, consumers’ growing preference for cremation over traditional burials poses threats to revenue per client.
Nevertheless, with death being inevitable, steady demand for funeral services keeps the industry going. Incidentally, high mortality rates, an aging baby boomer population and efforts to strengthen business through expansion and acquisition bode well for players like Service Corporation International (SCI), Hillenbrand, Inc. (HI), Matthews International Corporation (MATW) and Carriage Services, Inc. (CSV).
About the Industry
The Zacks Funeral Services industry comprises companies that offer deathcare products and services in the United States. Firms in this space sell cemetery property as well as related products and merchandise including caskets; cemetery interment rights; burial vaults; garments; and stone and bronze memorials. Further, these companies possess funeral homes, cemeteries, funeral service/cemetery combination locations and crematoria. Incidentally, services booked in advance fall under the pre-need category, while services booked due to a sudden demise comes under the at-need category.
3 Trends Shaping the Future of the Funeral Services Industry
COVID-19 Impact Continues: Companies in the funeral services space have been witnessing elevated demand for products and services owing to increased deaths resulting from the pandemic. The constant spike in the number of COVID-19 cases has pushed up demand for funeral homes, crematories and morgues. However, social distancing-related limits on the gathering size at funerals have been hurting revenue per service performed. Also, lower social in-person interaction at funerals remains a threat to pre-need revenues. Apart from this, social distancing has led to increased online funerals – including live streaming of the services performed. This again poses threat to revenues of traditional funeral service players.
Stable Demand: While the funeral services industry is unpleasant by nature, the inevitability of death keeps demand for its services intact in general. Thus, industry players are likely to benefit from high mortality rates and an aging baby boomer population. In this regard, the entire funeral process that involves embalming as well as use of caskets, urns, vehicles, funeral staff and equipment among others acts as a major revenue source for industry participants. Additionally, companies are focused on strengthening base through expansion and acquisition of funeral homes as well as development of cemetery property to generate higher revenues.
Higher Cremation Rates Hurt Revenue Per Client: Rising demand for cremation over traditional funerals has been weighing on revenue per client in the funeral services space. Cremation costs much lower than traditional funeral, with the average cremation service cost being roughly $2,500. In fact, we note that the pandemic has fueled this trend, with families choosing cremations over elaborate traditional funerals.
Zacks Industry Rank Indicates Strong Prospects
The Zacks Funeral Services industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #4, which places it in the top 2% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident about this group’s earnings growth potential. Since the beginning of October 2020, the industry’s consensus earnings estimate for 2021 has jumped almost 33%.
Let’s look at the industry’s performance and current valuation.
Industry Versus S&P 500 and Sector
The Zacks Funeral Services industry has lagged the Zacks S&P 500 composite, while it has outperformed the broader Zacks Consumer Staples sector over the past year.
The industry has gained 16.3% over this period, compared with the S&P 500’s growth of 18%. Meanwhile, the broader sector has lost 0.8% in the said time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staples stocks, the industry is currently trading at 16.6X compared with the S&P 500’s 22.85X and the sector’s 19.09X.
Over the past five years, the industry has traded as high as 23.78X and as low as 14.07X, with the median being 17.78X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Funeral Services Stocks to Keep a Close Eye on
Service Corporation: This Zacks Rank #1 (Strong Buy) company has been focused on expanding its funeral homes network and managing costs efficiently. Notably, the company’s revenues are rising on increased funerals performed due to the pandemic. We note that Service Corporation is one of North America’s leading providers of funeral and cemetery services. Markedly, the company has seen upward estimate revisions for its 2021 bottom line over the past 30 days by 5%. Moreover, Service Corporation has an estimated long-term earnings growth rate of 11.8% and has seen its shares gain 8.6% in the past three months. Service Corporation has a trailing four-quarter earnings surprise of 55.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SCI
Hillenbrand: This Zacks Rank #2 (Buy) company’s shares have rallied 32.4% in three months. Further, the consensus mark for fiscal 2021 earnings per share has moved 3.8% north in the past seven days. Hillenbrand’s Batesville segment is engaged in manufacturing and selling funeral services products such as caskets, urns, containers, technology solutions for funeral homes and customers as well as other memorialization products. The segment has been benefiting from its effort to enhance customers’ experience, manufacturing excellence, product innovation and dependable delivery. Increased deaths from the COVID-19 pandemic have been lately driving revenues at this segment. Hillenbrand has a trailing four-quarter earnings surprise of nearly 46%, on average.
Price and Consensus: HI
Matthews International: The Pittsburgh, PA-based company operates through Memorialization, SGK Brand Solutions and Industrial Technologies segments. Its Memorialization segment is a provider of products like caskets, memorials and cremation equipment – mainly to cemetery and funeral home customers. The segment has been gaining on increased casket sales stemming from the pandemic. Also, higher sales of cremation equipment and cemetery memorial products have been aiding. The Zacks Rank #2 company is poised to continue benefiting from strength in its funeral home products business. Shares of the company have surged 32.5% in the past three months. The Zacks Consensus Estimate for its fiscal 2021 bottom line has climbed 2% in the past 30 days. Markedly, the company has a trailing four-quarter earnings surprise of roughly 43.6%, on average.
Price and Consensus: MATW
Carriage Services: The Zacks Rank #3 (Hold) company appears well placed to benefit from its robust expense management and focus on solidifying base – especially its cemetery portfolio. To this end, its recent buyout of three big funeral and cemetery combination businesses is noteworthy. This provider of funeral and cemetery services and merchandise has a trailing four-quarter earnings surprise of 22.5%, on average. Also, the consensus estimate for its 2021 earnings has remained stable in the past 30 days. Shares of the company have gained 31.2% over the past three months.
Price and Consensus: CSV
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