The InvoCare Limited (ASX: IVC) share price has fallen by a further 4.8% today after updating the market with guidance for the first half of its FY18 result.
InvoCare previously announced to the market that it was going to significantly invest for growth and changing preferences. It called the plan 'Protect & Grow', however it would mean a hit to earnings because of the costs to refurbish and a hit to sales with closed sites.
The company expects work will be done on 221 funeral locations of which, 58 will be refreshed shopfronts, 72 will be refreshed funeral homes, 34 will be enhanced funeral homes and 57 will be new growth shop fronts.
InvoCare made the distinction between these facilities because it has different projected CAGR growth rates of cases over the next five years. Refreshed shopfronts are expected to deliver a CAGR growth rate of 4.9%, refreshed funeral homes are expected to deliver a growth rate of 5.5%, enhanced funeral homes are predicted to deliver 9.4% growth and new growth shopfronts are expected to deliver growth of 28%.
If it achieves the above growth in cases then InvoCare may be able to generate a significant increase in earnings as it is also predicting case average growth to be 3% to 4% in the next five years.
InvoCare has modelled that it will increase its market share from 33% to 40% over a ten year period in the markets that it operates. It also announced it will enter the regional markets of Australia and New Zealand, which means encroaching on Propel Funeral Partners Ltd's (ASX: PFP) market.
However, InvoCare announced that this year's profit will be down. The first quarter's sales were down 6% and funeral case volume was down 6.7%. This was partly driven by the reduced number of deaths compared to last year, according to InvoCare's understanding.
Management expect that earnings before interest, tax, depreciation and amortisation will be down around 12% for the half-year and the full-year result will show a low single digit decline of earnings per share (EPS) compared to 2017.
Foolish takeaway
InvoCare is a high quality business and should be able to achieve pleasing long-term growth. However, the next year could be tough for the share price as earnings are not going the way investors expected. I'm personally interested in buying shares at the current price for an ultra-long-term hold.
