"Nothing can be said to be certain," Benjamin Franklin famously quipped, "except death and taxes." Capturing 30.6% operating market share of the former certainty of life is Australia's largest and only listed funeral service provider, Invocare Limited (ASX:IVC).
That significant 30.6% market share is derived from its Australia, New Zealand and Singapore businesses, where it boasts a market share of 34%, 32% and 10%, respectively. Invocare's market share did fall by 0.7% in the 2013 period, however in its August 2014 half-yearly result, the company reported that the declines have stemmed.
The August 2014 result also produced a 12.8% after-tax profit increase, a sign that Invocare's flat 2013 after-tax result was something of an aberration. In the four years prior, from 2009 to 2013, Invocare's after-tax profit increased by 72% from $30.6 million to $42.5 million.
But even if Invocare's short-term growth moderates, it is one of the better-placed companies in the ASX to benefit off Australia's ageing population over the long term — a macabre but pertinent fact is that the Australian Bureau of Statistics projects the annual number of Australians shuffling off this mortal coil will double by 2037.
Coupled with this projected 1% to 2% annual mortality rate increase, Invocare's pricing power is testament to the fact that it has managed to increase its average contract values above inflation consistently over the long term.
It is these fundamental industry tailwinds and predictability of earnings that allows Invocare to borrow reasonably heavily to fund acquisitions. Since listing in 2004 it has made 15 acquisitions, which have provided around half of its approximately 10.4% compound annual revenue growth since 2005. Invocare's current debt-to-equity ratio stands at 132%.
Indeed, consolidation of the funeral services industry via acquisitions is a global trend. The largest U.S. funeral services operator, Service Corporation International, controls 16% of its market, while the largest U.K. funeral operator, Dignity PLC, controls 11.9% of its market. SCI's debt-to-equity ratio is 233%, and Dignity's debt-to-equity ratio is a staggering 1,153%!
Invocare has the potential for further acquisitions, subject to regulatory approval.
Growth opportunities may also be found in IT services. Invocare currently has a 34% shareholding in online memorial website, HeavenAddress, which attracts approximately one-third of all funeral internet traffic in Australia, NZ and Singapore, and generates 1.2 million customer visits annually. Plans are underway to expand into the U.K.
But is Invocare a buy?
The rub for investors in this defensive, predictable-earnings company is price. At 30-times trailing earnings Invocare is arguably at present priced for perfection. However, it is certainly one company to keep on the watchlist — especially when share prices fluctuate—another certainty of life.
One company that is however well priced to outperform is The Motley Fool's top stock idea for 2015.
