By Nick Ravo
The market’s plunge from record highs has slammed most sectors, including one in which investors might have expected a grim bounce as the coronavirus pandemic kills tens of thousands worldwide: companies in the $20 billion death-care industry, particularly funeral homes and cemeteries .
Take Houston-based Service Corp. International (ticker: SCI): After earlier pulling its earnings estimates for the rest of the year, the funeral-goods company on Thursday reported adjusted earnings of 43 cents a share, down 8.5% from the year-earlier period. Analysts had predicted earnings of 46 cents a share.
While SCI’s first-quarter sales and net income did top last year’s showing, shares were still reflecting the coronavirus uncertainty and closed Monday at $36.38, down about 31% from their 52-week high of $52.89 on March 4 and down 21% year to date. With about $3.2 billion in annual revenue and a $7.2 billion market capitalization, SCI is the largest company in the sector in North America.
Funeral homes and cemeteries aren’t grappling only with social-distancing limits on big gatherings that are pinching earnings, but the pandemic also threatens to exacerbate a trend that has been plaguing the industry: More families are forgoing traditional funerals in favor of cremations, and they’re picking less expensive options on such things as caskets when they do opt for a burial.
Scott Schneeberger, senior business services analyst at Oppenheimer, said companies like SCI face declining revenue because of two trends related to limits on social interaction during the pandemic. “‘Social distancing’ significantly limits the funeral size/scope the company is able to conduct, and the reduced in-person interaction climate hinders the ability to transact ‘pre-need’ arrangements,” he wrote in a March 31 research report.
Yet he said the company—even under the worst-case scenario , where there are social-distancing limits through year’s end—should slog through and start to recover next year. “We think they could still have a good 2021,” he said.
He retained his Outperform rating on SCI but lowered his 12-month price estimate to $47 from $53.
Company executives were also optimistic. “We came into this crisis in a very strong financial position,” said CEO Tom Ryan. “We have a strong balance sheet, tremendous liquidity and a favorable debt maturity profile. This foundation will allow us to weather this storm.”
Yet companies like SCI are also contending with a fragmented industry and broader trends toward less-expensive goods and services.
These risk factors have weighed on the other publicly traded players in the sector. Funeral-homes operator Carriage Services (CSV) has fallen about 42% year to date, funeral and cremation provider Park Lawn (PLC.Canada) has dropped 30%, and StoneMor Partners (STON), another funeral-home operator, has declined nearly 63%. These companies together represent only about 15% of the 19,000 funeral homes in the U.S.; the rest are mostly small, independently owned businesses.
Hillenbrand (HI), which sells caskets and cremations, has declined around 39% in 2020, and Matthews International (MATW), which provides caskets and cremation equipment to cemeteries and funeral homes, has dropped 38.5%.
Mergers-and-acquisitions activity, which has been a driver for large companies in the sector, will likely stall because of the pandemic. Brad Green, the interim CEO of Park Lawn, which made six acquisitions last year as part of an expansion into the U.S., said on a recent conference call that the company will re-evaluate its acquisition pipeline and may defer certain opportunities. “Our immediate focus is on preserving financial flexibility,” he said.
Funeral homes are also struggling in the presell market—a large source of revenue for many of them—as potential customers, usually the elderly, aren’t buying arrangements in advance during the pandemic.
A more daunting trend is the long-term shift from traditional funerals with caskets and burials, which often cost more than $10,000, to less-expensive cremations, which run about $1,500 to $5,000, and other funeral and memorial options, according to Tom Anderson, editor of Funeral Director Daily.
“I believe families will say, ‘You know, we can’t have a funeral now, so let’s forgo that.’ And they may also say, ‘Let’s delay the large gathering,’” he said. “We have changed from a burial society to a cremation society, and that’s been happening over 25, 30 years.”
The best-case scenario for many funeral homes, he said, would be flat revenue growth from an increased number of funerals offsetting the smaller sizes: “Could be a wash.”
