Market conditions have been tough for investors and for companies coming to equity markets looking to raise money. So, it was surprising to hear that a little microcap stock managed to generate enough investor demand on the Street to warrant an upsized bought-deal offering earlier this month. That stock is Park Lawn Corp.
The company
Headquartered in Toronto, Park Lawn is the only Canadian publicly traded cemetery, funeral- and cremation-services stock. The company has operations in the Greater Toronto Area, Ottawa, Quebec, Manitoba and Saskatchewan with more than 140 acres of land and 40 years of available inventory. The shares trade on the TSX Venture Exchange.
The stock has attractive, defensive features, some of which are outlined below:
Acquisition growth
The industry is highly fragmented. Management estimates that approximately 70 per cent of operators in the funeral, memorial and crematorium industry are not owned by large corporates. Most funeral-service providers are family-operated or run by non-profit religious groups. This provides management with plenty of acquisition opportunities. In recent weeks, the company has announced two acquisitions. On Nov. 30, management announced a small, tuck-in acquisition of Basic Funerals for $740,000. On Dec. 2, Park Lawn announced plans to make its move into the United States, with the acquisition of Midwest Memorial Group for approximately $16-million (U.S.), which the company funded through a bought-deal financing.
Internal growth
In the summer, management completed a major expansion project at its Westminster cemetery in Toronto, which should generate solid revenue and cash-flow growth in 2016.
Demographics
Statistics Canada estimated that in 2011, there were five million Canadians ages 65 years and older, and forecast this figure to grow to more than 10 million by 2036.
Profitability
The company is well on its way of delivering another year of growth. During the first nine months of 2015, revenue totalled $21.5-million. In 2014, total revenue was $23.7-million, and in 2013, revenue was $17.3-million. The average burial plot costs $10,000 and has a gross profit margin of 40 per cent. A crypt, on average, costs $16,000 and has a gross profit margin of 35 per cent. Cremation services are estimated to have a 65 per cent profit margin, while funeral services have 90 per cent margins, according to Park Lawn management.
Barriers to entry
Government regulation and zoning approvals act as barriers to competition wanting to enter the funeral-services industry.
Dividend policy
The company pays shareholders a monthly dividend of 3.8 cents a share, or 45.6 cents a year, equating to an annualized yield of 3.8 per cent. Management has maintained the dividend at this rate since January, 2011.
The payout ratio as a percentage of adjusted cash flow was 34 per cent in the third-quarter, and stood at 40 per cent for the first nine months of the year, suggesting that the dividend is sustainable.
Valuation
The stock currently trades at a price-to-cash flow multiple of 6.5 times the consensus estimate, below its historical average.
Analysts' recommendations
According to Bloomberg, there are three analysts who cover this stock and all three analysts have buy recommendations. Target prices are $13.30, $16 and $17. The average one-year target price is $15.43, implying a potential price return of approximately 27 per cent.
The consensus revenue estimate is $28.95-million in 2015, expanding 25 per cent to $36.25-million in 2016. The consensus cash flow per share forecast is $1.21 in 2015, rising to $1.90 in 2016.
Chart watch
Year-to-date, the stock price is down 12 per cent. During 2015, the stock has been consolidating largely in the $11 to $13 price range and is currently in the middle of this range.
The stock chart, from a technical perspective, is not strong. The stock price is trading between its 50-day moving average and 200-day moving average, and as such, is not compelling. Another weakness is that the 50-day moving average, at $11.75, is below the 200-day moving average, at $12.20.
The average daily volume over the past 60 days is just more than 13,000 shares.
The bottom line
The price of this stock can be volatile due to its low trading volumes. In the near-term, the stock price may drift back down to the $11-to-$11.50 range, which would be an attractive level to accumulate shares.
As always, I encourage readers to consult a financial adviser and to do their own due diligence before taking any investment action.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.