In afternoon trade the InvoCare Limited (ASX: IVC) share price is 1% lower to $17.05.
But as far as one leading broker is concerned its shares could continue to tumble further over the coming months.
According to a note out of UBS, the investment bank has downgraded the funeral company to a sell rating from neutral.
The broker has, however, raised its price target from $14.70 to $16.10. This is approximately 5.5% lower than the current share price.
UBS has made this move on valuation grounds, which isn't at all surprising in my opinion.
After all, the investment bank estimates that InvoCare will deliver earnings per share of 54 cents in FY 2017 and then 56 cents in FY 2018.
This means that InvoCare's shares are changing hands at 30x estimated FY 2018 earnings. This is a considerable premium given its current growth rate.
Should you sell?
While I think InvoCare is a quality business and deserves to trade at a premium due to its defensive nature, I don't think it warrants a multiple of 30x forward earnings.
In light of this, I would agree with UBS that the funeral company is a sell today.
The same could be said for rival Propel Funeral Partners Ltd (ASX: PFP). Although I suspect it is capable of growing at a quicker rate due to its smaller size, its shares have rallied strongly since their IPO last month and look fully valued now.
