"Nothing can be said to be certain," Benjamin Franklin famously quipped, "except death and taxes." Such certainty has seen Australia's largest and only listed funeral services provider, InvoCare (ASX:IVC), deliver compound annual returns exceeding 14% for the last decade.
InvoCare — a portmanteau of "Innovation, Vocation, Care" — operates 250 funeral homes, 14 cemeteries and crematoria, and is behind 60 funeral brands including national names such as White Lady and Simplicity.
For some, the thought of investing in funerals services can stir an uncomfortable macabre feeling. However, the logical counter is that InvoCare provides an essential service — one we'll all inevitably need one day — and the stability of the industry makes it a worthy candidate for our investment capital.
Attractive economics
With the tailwind of Australia's ageing population blowing at its back, InvoCare remains well-placed for steady growth over the long term: the Australian Bureau of Statistics projects a near doubling of annual deaths over the next 30 years.
This growth is complemented by a level of pricing power that comes with providing an essential service, particularly cemeteries and crematoria. Testament to this is InvoCare's consistent increases in average contract values above inflation over the long term. That said, apparently new market entrants' main angle is to compete on price.
Another attractive, and somewhat unique, industry feature is the growth in funeral insurance. Around 14% of InvoCare's Australian funerals are now prepaid. In fact, the business is sitting on over $420 million in prepaid services, adding further stability to what is an already predictable industry.
A market leader in Australia, New Zealand and Singapore, 2014 saw the business venture into the $20 billion US market in search of growth. Holding around a third of the market in Australian and New Zealand means competition concerns limit expansion options at home.
Opportunities and challenges of moving State-side
Case volumes in InvoCare's US entry market of southern California have been tracking 20% below plan, and the start-up losses are weighing on the performance of the collective business. Although performance is expected to improve with a ramp up in marketing, InvoCare is up against some large, well-established listed funeral operators in Service Corporation (NYSE:SCI), StoneMor Partners (NYSE:STON), and Carriage Services (NYSE:CSV), as well as privately-held Arbor Memorial Services.
But don't be completely dissuaded by this hefty-sounding competition. The American industry has a number of attractive features, including higher average funeral costs and a still fragmented market. In stark contrast to Australia, the top 5 operators only account for around 37% of the industry — around InvoCare's own market share back home.
Most of the 19,500 funeral homes in the US are small operations, often owned by the same families for generations. Similarly, many of the 120,000 cemeteries belong to families, nonprofits, and religious institutions. Consequently, the consolidation opportunity remains immense, albeit at increased level of risk for InvoCare being a new, foreign entrant.
A healthy dose of caution is warranted in considering the US opportunity. The company flagged an initial investment of US$8 million over 3 years, with annual losses running at US$2 million. However, the recent results showed that losses are running above this and ramp up remains slower than forecast. Patient investors should remain wary until firm runs are on the board. Too many Australian businesses have gone offshore chasing stars of growth, only to return with dusts of shareholder capital.
Recently appointed CEO Martin Earp, however, is no rookie. His previous role as Chief Executive Officer of Campus Living Villages included operating businesses in the US, and the InvoCare board had 'US growth' front of mind when they appointed him in May 2015. But Mr Earp has his work cut out for him to deliver the growth expectations built into the current share price.
US peers Service Corp and Carriage Services are trading at less than 20 times earnings, while InvoCare is changing hands at closer to 25 times, putting InvoCare on the expensive side.
