There are three sure things in life: death, taxes, and insert joke inclusion here. Really there’s only two sure things. There aren’t any great ways to invest in taxes (get a government job?), but there is a way to invest in death. That is to own a cemetery.
Story time! I worked two summers during university as a caretaker at the local cemetery, and it was the best job I’ve ever had. It was mostly mowing the grass, in a cemetery with mostly straight rows of graves, so it was just going back and forth in a straight line. And about once a week or so (small town) there would be a funeral. For this me and the guy I worked with would have to dig a grave (with a backhoe, so little manual labour) and then simply go out in the back of the cemetery and make ourselves scarce. We had to be around in case something needed done, but we couldn’t be heard nor seen by the group, so we couldn’t cut the grass. We just had to sit there. Then afterwards we’d go fill in the grave and get back to work. I have never had a job that allowed me to think as clearly or have deep conversations, as deep as university students can have, as that job.
Back to investing. Park Lawn Corp owns cemeteries, funeral homes, crematoria, and mausoleums. Currently they own over 140 acres of land, which will supply up to 40 years of inventory. For a cemetery owner inventory is places to put the deceased. Park Lawn is also the only publicly traded company in Canada in this business, so they’re the only ticket in town if you want to invest in this. And the death business is a good one.
Since they are the only public company serving this industry, we can’t use the valuation of peers to understand Park Lawn’s valuation. Full year 2016 numbers will be released shortly, but at this time, shares are trading at 18x P/EBITDA using the last 12 months EBITDA. That EBITDA number is up over 20% from 2015’s numbers (yes I know that is counting Q4 2015 twice). That’s a PEG of 0.9. And EBITDA is expected to grow in 2017. Analyst Brian Pow is estimating the stock is trading around 10x 2017’s EBITDA. Really though this is playing with the numbers a bit. Park Lawn has the growth there, but it’s still not a value stock, you have to pay up to get that growth.
What I really like about Park Lawn is the business they are in. That’s what brings value to this investment. Several years ago when I first looked at this company, they were mostly a cemetery company. People would pay them for a small plot of land to be buried in. Since however, they’ve pivoted to operating funeral homes, running crematoria (the plural of crematorium, even though is sounds dumb it’s correct), and building mausoleums (mausolea? Nope, what a logical language English is).
If you’re looking into funeral costs, or making plans for your own, you may not want to hear these numbers. The death business has very good margins. The following is straight from Park Lawn:
On average the company estimates that a cemetery plot costs $10,000 with a gross profit of $4,000, a crypt at the time of sale $16,000 with a gross of $5,600. A recent expansion of 3,200 crypts at the Westminster facility will yield a 20 percent rate of return or $17 million gross profit. Cremation services are estimated to have a 65 percent profit margin while funeral services are at 90 percent
Most businesses would love those margins. And preferences are shifting towards cremation as the method of “disposal” of human remains. This shifts more of their customers to the higher margin, less resource intensive product. Funeral services make up about 15% of Park Lawn’s revenues, are even higher margin, and is making up more and more of the company’s acquisitions.
The business is not recession proof (here’s a good article from the Globe & Mail about the industry) but it’s close. One of Canada’s best investors, Prem Watsa, owns Arbor Memorial, a large Park Lawn competitor. Everyone will be a customer of one provider or another, even if the provinces have to pay for it. Around 80% of customers pay for their plots years ahead of time.
That last point is an important one to cemetery companies. When you buy a cemetery plot for yourself years ahead of time, the money goes towards several things.
First, the company is required to put a portion of the money into a “Care and Maintenance Trust”. Income from this trust is used to pay for the care and maintenance of Park Lawn’s properties. So one of the largest costs of the business is paid for by investment income. Currently Park Lawn has over $85 million in this trust, invested into stocks, fixed income, preferred shares, and cash/cash equivalents. This trust yielded over $3 million in the first nine months of 2016. If this income results in a surplus, it gets added to the trust, meaning the company cannot take money out of this trust. Care and maintenance trusts are meant to pay for the operating costs of cemeteries in perpetuity, so a lot of Park Lawn’s expenses are already covered for many years to come.
The second trust is the “Pre-need Trust”. This trust is just what it sounds like. The money is invested until the customer passes away, at which point the money is used to pay for the supplies and services needed for the funeral proceedings. some provinces have a law stating the company must pay excess investment returns to the customer’s family at the time of death. On September 30, 2016 Park Lawn had over $62 million in this trust.
Finally, the remainder can be used by the company for the normal things for which a company would use money.
The nature of these trusts is sort of similar to the concept of float with insurance companies. Unfortunately the company can’t realize benefits of its investment performance in that they’ll realize earnings from it. But there is the benefit of having the funds to pay for future costs, like paying university students to cut the grass, for years to come.
Growth & Goals
CEO Andrew Clark has led the growth transformation of Park Lawn, pivoting from a income trust to a growth company in a very fragmented industry. He recently stated that over the next 3 years the company can triple cash flow (from $8.1 million to $25 million) over the next three years. That’s ambitious, but even if they fall short by 50% that would mean they’ve grown cash flows by 150%. In 2017 they’ve already acquired 5 funeral homes, including their first expansion into British Columbia, and a discount cremation service provider. The company pays between 4-6x EBITDA for acquisitions, so you can see management are value investors as well. And the low price paid for acquisitions makes any acquisition immediately accretive to earnings.
There are many more opportunities for expansion. Funeral homes are mostly owned by families, and Park Lawn is seeing that the children often don’t want to keep the family business. In Ontario alone there are 700 funeral homes. The company estimates there are 5500 cemeteries. Many of these operations will become available as retiring operators look to cash out. To a retiree, I bet a 5x EBITDA payout is very enticing. Park Lawn is also often able to expand their currently owned operations, by putting in more crypts in a mausoleum for example, something they’ve done successfully for returns of 20+%.
Park Lawn Corporation is a growing company in a unique industry with favourable features. Management has led an aggressive pivot, which has grown a previously boring income stock. When the current CEO came on, he spent his whole life savings to buy 15% of the company, showing me he’s committed and excited about their prospects. Shares currently pay a 2.7% dividend with a payout ratio of 37% of cash flow. While it is not classically cheap right now, with the company’s growth it is not expensive either.
Disclosure: I do not currently own PLC shares, and have no intention to purchase in the next 72 hours.