The InvoCare Limited (ASX: IVC) share price has been on a run lately. After hitting a five-year low of $10.23 just after New Year's Day, it has rallied over 23% since and is now trading at $12.69 at the time of writing.
InvoCare is the largest funeral provider in Australia and has a significant presence in New Zealand and Singapore, operating 290 funeral locations and 16 cemeteries and crematoria around the world. It employs over 1,800 people and has a turnover of around $400 million a year, with a market cap of $1.37 billion. Using its household-name brands – White Lady Funerals, Simplicity Funerals and Whitestone Funerals in New Zealand, InvoCare has managed to establish significant market dominance in what is otherwise a highly decentralised industry.
I love InvoCare's business model: death is an unavoidable part of life and funerals are something that people are not afraid to spend money on, regardless of economic conditions. However, with a trailing P/E of 18.13 and a Price to Book ratio of 8.25 (ouch), is InvoCare overvalued at these prices?
The foundation of InvoCare's profitability are death rates and the company expects deaths in Australia to increase at a rate of almost 3% annually by 2034. This is a healthy foundation to build on but organic growth of 3% is nothing to get too excited about in my opinion. InvoCare has also been concentrating on expanding into regional markets, where it currently holds a 5% market share (as opposed to its 32% share in metropolitan areas), but I'm not sure this justifies its sky-high P/B ratio.
Although the share market is recovering nicely from last year's correction, I think investors are still nervous about 2019 and this has increased the appetite for 'safer' stocks like InvoCare. After all, demand for InvoCare's services is not going to dry up in a recession.
Foolish Takeaway
Although I love InvoCare as a company and do want to open a position at some point, the price must be right and at these levels, I don't think it is. As investors, we have to be patient and wait for the right moment, and sometimes this can take years and I'll be waiting a little bit longer to buy InvoCare shares.
