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.Getty Images/iStockphoto
Investors could see renewed life in death-care company Park Lawn Corp. now that it has graduated to the Toronto Stock Exchange and amid growing demand for its services among an aging baby boomer population.
Shares of Toronto-based Park Lawn, Canada's only publicly listed death care provider, have risen by about 40 per cent over the past year. Stock in the company, which owns and operates cemeteries, crematoriums and funeral homes in Canada and the U.S., hit a record high of $16.75 on Thursday.
Park Lawn graduated to TSX from the TSX Venture exchange on Wednesday, which analysts say should give it more exposure to a broader range of investors.
"It really opens up the door for certain [institutional] investors that couldn't historically own a venture-listed company," said Acumen Capital Research analyst Brian Pow, who has a "buy" on the stock.
All four analysts that cover Park Lawn have a "buy" rating. The analyst consensus price target over the next year is $18.11, or 8.5 per cent above its Thursday closing price of $16.69.
The company's healthy dividend, yielding 2.8 per cent, and its acquisition strategy, are also appealing to investors.
Park Lawn is on a mission to buy smaller, private players across North America, a growing number of which are seeking to retire and unload their businesses. About 80 per cent of cemetery and funeral homes assets in Canada are owned by independents, and 90 per cent in the United States, Cormark Securities analyst Maggie MacDougall said in a recent note, where she initiated coverage of Park Lawn with an $18.75 target.
Ms. MacDougall also points to barriers to entry for outsiders, including regulatory hurdles and a reluctance by municipalities to zone new land for cemeteries.
Then there's the demographic impact.
"The phenomenon of the aging population in the U.S. and Canada is well known and widely discussed; however, we do not believe that the impact demographic trends will have on the death care industry is well understood," Ms. MacDougall said in a note.
"The rapidly growing senior population in North America is expected to result in a considerable increase in the number of deaths, fuelling growth in the cemetery, cremation, and funeral services industry."
Park Lawn has 34 cemeteries and mausoleums, 16 cremation facilities and 22 funeral homes, chapels and planning offices in Ontario, Quebec, Manitoba, Saskatchewan and Michigan. About 55 per cent of its revenues are in the United States and the rest in Canada.
About 85 per cent of its revenue comes from the cemetery, mausoleum and cremation operations and the rest from sales of funeral products and services.
"Our bias … is towards the cemetery side of things," Park Lawn chief executive officer Andrew Clark said in an interview.
"The margin profile isn't as good as the funeral home business, but the stability of the cash flow is better, [it's a] more predictable business and the barriers to entry are significantly higher."
Geographically, the company expects more of its acquisitions to come from the larger U.S. market.
"There's more deals, more brokers, more players, so there's more opportunity for people like us," Mr. Clark said.
He said the "biggest threat" to the industry is the rise in cremations, a lower cost and more convenient service as compared with a traditional burial. Mr. Clark said cremation margins are higher, but because they are lower priced compared with other products they sell, they contribute less to overall revenues.
"We think we are very well positioned and we've demonstrated that we can make money in a high cremation market. We view it as much of an opportunity as a threat," he said.
Other risks for the company include increased competition and an economic downturn, which could cause consumers to spend less on death services.
Bruce Campbell, portfolio manager at StoneCastle Investment Management, doesn't own the stock because it's not very actively traded, which makes it difficult to buy and sell as needed. The valuation is also expensive now, given the runup in the stock price over the past year.
Still, he likes the business strategy and the growing market opportunities.
"It's a business where, inevitably, all of us have to end up using their products one day," Mr. Campbell said.