Rising Demand Keeps Funeral Industry Going: 4 Stocks to Watch

Players in the Zacks Funeral Services industry are seeing increased demand owing to the spreading of the coronavirus pandemic that has claimed thousands of lives. With no effective treatment in sight, increased deaths from the virus is likely to keep fuelling demand for products and services of the industry’s players. However, the pandemic-led social distancing has limited funeral size and scope, thereby hurting revenue per service performed. Also, consumers’ rising preference for cremation over traditional burials poses threats to revenue per client.

Nonetheless, with death being inevitable, steady demand for funeral services keeps the industry going. To this end, 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.

4 Trends Shaping the Future of the Funeral Services Industry

Impact of COVID-19: Increased deaths due to the coronavirus pandemic have raised demand for products and services of companies in the funeral services space. The constant increase in the number of COVID-19 cases has spiked up demand for funeral homes, crematories and morgues. However, social distancing-related limits on the gathering size at funerals are weighing on revenue per service performed. Also, lower social in-person interaction at funerals is a threat to pre-need revenues. Also, 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.

Steady 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 significant revenue source for industry participants. Also, companies are focused on strengthening base through expansion and acquisition of funeral homes as well as development of cemetery property to generate greater revenues.

Increased Cremation Rates Hurt Revenue Per Client: Rising demand for cremation over traditional funerals has hurt revenue per client in the funeral services space. Cremation costs significantly 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 the elaborate traditional funerals.
Threat from Cheaper Alternatives: Availability of funeral-related products on the e-commerce platform and use of environment-friendly alternatives for burials are quite a threat to industry participants. Evidently, consumers are choosing shrouds and woodland burials over coffins and graveyards, while tech advancement is increasing the popularity of video tributes.

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 #25, which places it in the top 10% 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 robust 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 end of May 2020, the industry’s consensus earnings estimate for the current year has jumped almost 22%.

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 as well as the broader Zacks Consumer Staples sector over the past year.

The industry has declined 15% over this period against the S&P 500’s growth of 11%. Meanwhile, the broader sector has lost 7.4% 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 16.23X compared with the S&P 500’s 21.61X and the sector’s 19.27X.

Over the past five years, the industry has traded as high as 23.78X and as low as 14.07X, with the median being 17.84X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Funeral Services Stocks to Keep a Close Eye on

We are suggesting three stocks from the Zacks Funeral Services that currently carry a Zacks Rank #2 (Buy). We are also presenting a stock with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s take a look.

Service Corporation: The company is one of North America’s leading providers of funeral and cemetery services. This Zacks Rank #2 company has been focused on expanding its funeral homes network and managing costs efficiently. Notably, the company’s revenues are gaining on increased funerals performed due to the coronavirus pandemic. Importantly, the company has seen upward estimate revisions for its 2020 bottom line over the past 60 days by 29.3%. Moreover, Service Corporation has an estimated long-term earnings growth rate of 10.8%, and has seen its shares gain 10.8% in the past three months.

Price and Consensus: SCI

Hillenbrand: This Zacks Rank #2 company’s consensus mark for fiscal 2020 moved 20% north in the past 60 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 36.8%, on average, and its shares have rallied 4.1% in three months.

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 Zacks Rank #2 company is poised to benefit from strength in its funeral home products business. Steady demand for caskets and cremation equipment along with favorable orders for cemetery memorials are likely to be key atalysts. Shares of the company have surged 17.4% in the past three months. The Zacks Consensus Estimate for its fiscal 2020 bottom line has climbed 7.4% in the past 60 days. Markedly, the company has a trailing four-quarter earnings surprise of roughly 25%, on average.

Price and Consensus: MATW

Carriage Services: The bottom line of this provider of funeral and cemetery services and merchandise has delivered positive surprises in the last two reported quarters. Also, the consensus estimate for full-year 2020 has moved up 10.7% over the past 60 days. The 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 are expected to be a major driver. Notably, this Zacks Rank #3 company’s shares have gained 21.4% over the past three months.

Price and Consensus: CSV

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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