2023-12-20 13:45:29 ET
Summary
- Park Lawn Corporation is a leading provider of funeral and cremation services in Canada and the US.
- The company has so far had a successful growth-by-acquisition strategy and has a significant opportunity to further consolidate the fragmented death care industry.
- The company is benefitting from favorable industry tailwinds that should position its business for growth long term.
- Park Lawn is trading at a discount to its peers in the funeral home space and is trading at the lower end of its historical EV/EBITDA range.
Please note all $ figures are in , not , unless stated otherwise.
Investment Thesis
Park Lawn Corporation (PLC:CA) is a consolidator in the death care space, acquiring funeral homes and crematoriums across North America through a roll-up strategy. With favorable tailwinds like an aging population, succession challenges for funeral home operators, and predictable and re-occurring revenues, Park Lawn's boring business is highly profitable and growing. Trading at a discount to its US peers south of the border and at the lower end of its historical valuation range, Park Lawn is a company I'm buying shares in today.
The Business
Park Lawn is one of the largest providers of funeral and cremation services in Canada and the United States with 37 locations in Canada and 291 locations in the US. Over the years, the company has executed a growth-by-acquisition strategy of acquiring funeral homes, cemeteries, and cremation sites in an effort to consolidate a highly fragmented industry. It shows in the numbers too. Since 2017, Park Lawn has compounded revenues and adjusted EBITDA at a 34.5% and 37.3% CAGR, respectively, with fairly consistent increases each year all while ensuring minimal dilution in order to create long-term shareholder value over time.
As a company, Park Lawn operates in what could be considered an unsexy or boring business - the death care and funeral services sector. Despite the industry's nature, Park Lawn has established itself as a notable player in this field by offering a range of comprehensive services that support families during challenging times.
Founded in Toronto, Canada, with a modest beginning of just six properties in 2013, Park Lawn has demonstrated significant growth and expansion since its inception. One key factor I believe has contributed to its success is its ability to adapt and evolve within the death care industry. The company doesn't just focus on traditional funeral services but also offers end-of-life planning, cremations, and memorialization products.
The traditional funeral services, such as burial ceremonies and cremations, form the core of the company's offerings. However, Park Lawn's expansion into end-of-life planning and memorialization products further broadens its revenue potential. End-of-life planning involves pre-arranged funeral services, estate planning, or related advisory services and memorialization products encompass a variety of items such as urns, keepsakes, memorial jewelry, and personalized commemorative items. These products not only serve as a meaningful way for families to honor their loved ones but also represent additional sources of revenue for the company.
Growing from just six properties in Toronto in 2013, Park Lawn has developed an increasingly large US presence over time ad has been a critical part of its growth strategy. Over various earnings calls, management has frequently referred to this market as being untapped and so this presents Park Lawn with an opportunity to consolidate the market and broaden its reach geographically. Having spent $105 million on average on acquisitions over the last five years, it often looks for targets that can be integrated with existing operations or those that can provide entrance to a new high-growth market.
The Opportunity
According to IBIS World , the North American death care industry is a $22 billion industry with $17 billion generated from over 20,000 funeral homes and $5 billion generated from 6000 cemeteries. Expected to grow at a 6.1% CAGR from 2022 to 2030, the growth is mostly driven by population and demographic trends in North America. As shown by the graph below, there is expected to be a near doubling of the number of persons aged 65 and above in the next three decades. With an aging population, this also means that mortality rates will be on the rise, a trend that should bode well for the death care industry as the demand for its services rises.
The death care industry is a huge market with many players. Of the larger companies, key players include Service Corporation International (SCI) and Carriage Services (CSV) as the main publicly traded competitors, but there are also large private companies like Legacy Funeral Group, Foundation Partners, Arbor Memorial Group, and NorthStar Memorial Group. However, despite these larger players, the market is highly fragmented market with about 80% of funeral homes being independently run. This means that they operate as small, local businesses rather than being part of larger corporate chains.
One of the biggest issues for independent funeral home operators I view as an opportunity for consolidators like Park Lawn is the challenges of succession. For example, many funeral home owner-operators are entering retirement age and have no one in the family willing to manage the business. After all, which son or daughter wants to manage Grandpa's funeral home and crematorium? Certainly not me.
Nevertheless, it's a widespread challenge faced by several owner-operators. In a study conducted by the National Funeral Director Association, over a quarter of owners planned to exit the business or retire within a five-year time horizon. With an urge to sell, consolidators like Park Lawn, as well as private equity, have been consolidating the industry. This has pushed up multiples from the 3x to 5x annual revenue range to 7x to 9x. With higher multiples, this could be seen as a challenge, however, Park Lawn has indicated that it is still seeing no shortage of opportunities.
With no need for a marketing budget (as goodwill has often been built up in local communities over time) and the unwillingness to 'shop around' by consumers ( only 1 in 5 consumers visit more than one funeral home to obtain a price list), the death care industry exhibits attractive characteristics. Coupled with succession challenges and favorable demographics, there still remains an opportunity for consolidation in the market.
Financials
For its most recent quarter , revenue was up 8.2% and adjusted EBITDA increased 3.6%, with margins up 90 basis points. Through improved operating cost management, the company has been able to save in key areas like labor which I believe signifies that the company has been able to enhance its profitability by controlling costs more effectively in relation to its revenue.
On the balance sheet front , Park Lawn clocked in a leverage ratio of 2.4x based on its credit facility terms and 3.2x including its outstanding debentures. One important event subsequent to the quarter that would have changed these numbers in my view is the divestment of 72 cemeteries in Kentucky, Michigan, North Carolina and South Carolina and 11 funeral homes in Kentucky and North Carolina.
Valued at $70 million and 8.0x adjusted EBITDA, this transaction seems like a strange deal for Park Lawn as a consolidator. However, the transaction should reduce the company's leverage ratio to approximately 1.9x or 2.7x including Park Lawn's outstanding debentures (according to Park Lawn's estimates). This should also free up cash for the company to explore opportunities and targets that offer better long-term growth potential. When asked about the M&A pipeline and opportunity set Park Lawn is seeing given they just divested some assets, CEO Brad Green had this to say:
So yes, I mean, I think that the opportunities are still out there. I think we're going to have plenty of opportunities to make acquisitions, if that's where we continue to decide to deploy our capital. And I think we're going to have more opportunities to do it because we didn't over lever ourselves in 2021 and 2022, like a lot of people did. So we have a lot of capital, but we're being very selective now, on the acquisitions that we're going to go forward with. Because in my mind, they have to be immediately accretive, and we have to be able to bring them online faster in this type of capital environment with our investors expectations.
He also mentioned that while acquisitions this year were on the lower side, investors should not read into it as there aren't opportunities out there. Much of what's going on is largely a reflection of sellers' expectations still being ahead of what buyers are willing to pay, and how we are no longer in an aggressive market environment like 2021 when interest rates were very low.
In my view, this signifies that once the market returns to an equilibrium where buyers and sellers are closer together on price, Park Lawn is going to be in a better position to carry out M&A. With a better balance sheet post-divesture, I believe the company will be on track to up its growth capex spend on acquisitions in 2024.
Valuation
During the pandemic period when equities shot up on a lower interest rate environment and increased stimulus, Park Lawn's shares became overstretched. For much of the period between 2019 to 2020, Park Lawn traded at an EV/EBITDA multiple of around 30x, which is pretty expressive for a company averaging only 3.3% organic growth pre-pandemic (TD Securities).
Naturally, as perhaps might have been expected, Park Lawn's shares experienced a subsequent decline. However, upon closer scrutiny, I posit that this downward trajectory has led to an overshooting of the company's valuation, with shares now positioned at a significantly reduced 10.6x EV/EBITDA multiple. The current valuation appears to be the cheapest Park Lawn has ever been, suggesting a potential undervaluation that could present an opportunity for investors.
Both of Park Lawn's closest public peers, Service Corp International and Carriage Services trade at an EV/EBITDA multiple of 12.0x, which is higher than Park Lawn's 10.6x EV/EBITDA. When we consider that Service Corp International and Carriage Services have Debt to Equity ratios of 2.8x and 3.8x, Park Lawn looks to be in better shape to take on more debt in its cap structure with a ratio of 0.5x. Even on a Net debt to EBITDA basis, Park Lawn comes in at the lower end of the range with a ratio of 3.7x compared with 3.7x for Service Corp International and 5.8x for Carriage Services. To me, this suggests that Park Lawn is better positioned for potential future growth opportunities, given its comparatively healthier debt metrics and a more conservative leverage position than its industry rivals.
When we look at revenue growth, Service Corp International and Carriage Services have been growing in the mid-single digits, compared with Park Lawn's 34.5% CAGR. One of the only places Park Lawn is outshined by its peers is on the EBITDA margin front, with its peers at 29.4% and 27.6%, compared with Park Lawn's 22.5% margins (S&P Capital IQ).
While the company hasn't provided margin guidance for its 2026 target of US$150M of adjusted EBITDA and net earnings of US$2.00+ per share, I'm confident that the company should be able to narrow the margin gap between its peers, especially after indications we've seen in recent quarters.
Finally, based on the seven analysts with one-year target prices on Park Lawn, the average price target is $23.00, with a high estimate of $27.00 and a low estimate of $20.00. From the average, this implies about a 27.1% upside from the current price, suggesting analysts too feel the company is undervalued.
Risks
While there aren't all that many, the key risks to my investment thesis include overpaying for acquisitions and share dilution. With overpaying for acquisitions, Park Lawn was about to buy Carriage Services Inc earlier this year in a deal valued at over $400 million. At a larger EV/EBITDA multiple, the deal likely would have implied Park Lawn would be paying more for Carriage than what its own shares were being valued at. While Park Lawn eventually backed out of the deal, I think that overpaying would have been a huge mistake. Going forward, it will be important to monitor the multiples paid for acquisitions and how they are financed (through free cash flow, debt, or equity).
Takeaway
In summary, Park Lawn seems like a good value when stacking up its EV/EBITDA multiple against its peer group and its own historical valuation range. With favorable demographics stemming from an aging population and succession planning issues in the highly fragmented death care industry, Park Lawn should have no shortage of opportunities ahead of itself once it reduces its debt load post-divesture as it looks toward more profitable targets with better long-term potential. At a deep discount to peers at 10.6x EV/EBITDA, I'm a buyer of Park Lawn shares today.
For further details see:
Park Lawn: Boring Businesses Make Money