The InvoCare Limited (ASX: IVC) share price is down 6.6% this afternoon on the ASX, trading at $15.13 (at the time of writing), which is a significant fall from IVC's $16.20 opening price today. InvoCare shares were hit when equity analysts at Macquarie Group Ltd (ASX: MQG) suggested that the Australian Bureau of Statistics' death volume projections were too optimistic. So does this dip represent a buying opportunity for InvoCare?
What's been happening with the InvoCare share price this year?
InvoCare shares have been on an absolute tear in 2019 so far, with the share price up 48% year-to-date (YTD) on current prices (or 58% if you go from this morning's opening price).
InvoCare (if you didn't know) is Australia's largest provider of funeral and crematoria services, with a significant presence overseas as well. InvoCare has been implementing an aggressive expansion strategy in an otherwise highly fragmented market; last week the company announced it was adding yet another acquisition to its bulging portfolio – Toowoomba-based Australian Heritage Funerals.
Such a strong surge in share price is unusual for a company that has not seen a corresponding rise in revenues or earnings. In fact, between the 2017 and 2018 years, InvoCare increased revenues from $470.9 million to $477.3 million, but earnings after tax fell from $63.5 million to $49.5 million during the same period.
Although the company has issued guidance that 1H19's numbers should be back on track, the YTD price surge appears to indicate the market to be highly optimistic at best – InvoCare currently trades with a price-to-earnings (P/E) ratio over 40.
My conclusion is investors begun to price InvoCare as a 'bond proxy' – a company with revenues (and dividend) that are so solid that shares can be considered as safe as bonds (despite a dividend cut last year). Of course, the guidance out of Macquarie this morning throws cold water on this idea and has spooked investors. With the P/E ratio reaching 40, there wasn't a lot of upside (in my opinion) remaining in the share price and investors have taken a shower.
Is InvoCare a buy?
In my view, InvoCare remains a high-quality company at a ridiculous price. I might be showing my value-investing roots here, but paying 40 times earnings for a funeral provider seems downright silly to me. Either investors are assuming some kind of imminent apocalypse that would result in a boom for the funeral industry, or they are just chasing InvoCare's 'safe' yield.
Foolish takeaway
InvoCare shares, even after today's price drop, remain very expensive in my view. Charlie Munger (Warren Buffett's right-hand man) likes to say that "no matter how wonderful a business is, it's not worth an infinite price", but it appears investors are disagreeing. I'm going to side with Charlie on this one.
