3 Death-Care Stocks to Capitalize on the Only Certainty in Life


Fu Shou Yuan International, China's largest provider of funeral services, saw its share price rise 45% on its trading debut on the Hong Kong Stock Exchange in December 2013. Its share price has remained at similar levels since then. Are domestic death-care stocks such as Service Corporation International , Hillenbrand and StoneMor Partners equally attractive?

Recession-proof industry
There are two things certain in life: death and taxes. Industry numbers show the same picture. From 2000 to 2010, the number of deaths has been relatively stable as it has neither fell by more than 3% nor rose in excess of 1.5% annually. Based on research from the Center for Disease Control and Prevention and the U.S. Census Bureau, the number of deaths is expected to grow at about 1.5% per year into the future. In addition, the proportion of Americans aged 60 and above was 18.5%, and this ratio is projected to exceed 25% by 2030. Service Corporation, Hillenbrand, and StoneMor Partners have employed different strategies to capitalize on the stable industry growth.

Leveraging scale
Service Corporation is the largest player in the death-care industry, with a network of 1,431 funeral homes and 374 cemeteries as of December 2013. The industry is fragmented and the top four players, Service Corporation, Stewart Enterprises (acquired by Service Corporation), Stonemor, and Carriage Services, accounted for 13.7%of the industry's revenue in 2011. The lion's share of this revenue belongs to Service Corporation, which had 10 times the sales of its closest competitor Stonemor in 2012.

The funeral home and cemetery business is very localized in nature and Service Corporation has a big competitive advantage here with its size. It has a presence in 43 states in the country and it benefits from word-of-mouth and the strong brand name it has built up over the years. Furthermore, Service Corporation's size means economies of scale in purchasing, back-office operations such as accounting, and the leveraging of shared assets such as vehicles.

Following the completion of the acquisition of Stewart Enterprises in December 2013, Service Corporation expects to realize $60 million in annual cost savings, with increased purchasing power as a result of scale being a big factor in this.

Focus on cemeteries vis-a-vis funeral homes
Stonemor is the second-largest owner and operator of cemeteries in the U.S. behind Services Corporation, and it also has a stronger emphasis on cemetery assets than its peers. Stonemor operates about three cemeteries for every funeral home it runs while peers like Services Corporation and Carriage Services have on average four-to-five times more funeral homes than cemeteries.

Funeral homes are more services-oriented as they focus on the co-ordination of funeral proceedings and the preparation of the deceased's remains for viewing and burial. On the other hand, cemetery operations focus on selling products that include interment rights (the right to determine who can be buried in that grave), caskets, markers, cremation niches, and burial vaults.

Stonemor's focus on cemetery assets makes sense from a competitive point of view. While people can choose to switch to competing funeral services providers while incurring limited switching costs, potential customers or relatives of the deceased will want all of their family members to be buried in the same cemetery.

The scarcity of burial land suggests that there are higher barriers to entry for cemetery operations than there are for funeral homes. Therefore, Stonemor has acquired close to 150 cemeteries since its listing in 2004 to further expand its competitive advantages in this area.

Both specializing and diversifying
Hillenbrand's death-care brand Batesville is more than a century old, with its first handmade wooden caskets made in 1884. While Batesville provides a range of burial solutions and cremation options, the bulk of its revenue derives from the sale of caskets. Based on internal estimates, Batesville is the market leader in the $1.3 billion North America casket market with close to half of the market.

Batesville is also the leader in product innovation; examples include Dimensions-branded oversized caskets and veneer caskets that accommodate rounded corners. Caskets are the most profitable segment of the North American death-care industry, and the results speak for themselves. According to data released by Hillenbrand, Batesville has consistently delivered ROICs and EBITDA margins in excess of 60% and 25%, respectively.

Although the stability of demand is something to cherish, the death-care industry's growth prospects are inferior to those of other industries. Moreover, it is never wise to put all of your eggs in one basket. Hillenbrand has built a presence in the industrial-process equipment market (e.g. compounders, extruders, crushers) through a series of acquisitions over the past few years.

As a result, the company has significantly reduced its geographic and industry-concentration risks. In 2009, Hillenbrand entirely focused on the domestic market and generated all of its revenue from Batesville. Today, only half of its sales derive from the U.S., while the process-equipment business segment contributes more than 50% of Hillenbrand's total revenue.

Foolish final thoughts
The stable demand for the death-care industry and an aging population are positives for players in the death-care industry. Market leader Service Corporation can capitalize on its scale to drive costs down while Stonemor and Hillenbrand focus on their respective strengths.

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The article 3 Death-Care Stocks to Capitalize on the Only Certainty in Life originally appeared on Fool.com.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends StoneMor Partners. The Motley Fool owns shares of Hillenbrand and StoneMor Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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