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fabrice taylor

Fabrice Taylor, CFA, publishes the President's Club investment letter, for which he and The Globe and Mail have a distribution agreement.

The funeral business is not the sexiest industry, but like a lot of mature enterprises, it can provide lively returns.

Funeral industry sources predict that there will be 8.3 deaths per 1,000 people in Canada next year, which will rise by almost 20 per cent over the next 30 years. The actual number of deaths will likely increase even more because the population will grow over that period. Conclusion: Death is good business. This is all promising news for investors in Park Lawn Corp., the only publicly traded cemetery/funeral home stock on Canadian exchanges (rival Arbor Memorial Services Inc. was acquired by Fairfax Financial in 2012).

Park Lawn was a sleepy income trust that converted to a corporation in 2010. Since 2011, with the arrival of current chief executive Andrew Clark (who bought 15 per cent of the company with his life savings), the company has grown from six locations to 19 as it pursues a strategy of consolidating the industry and creating economies of scale. If successful, Mr. Clark will create a lot of wealth for investors, and I think he has a shot because this is a high-margin business with higher barriers to entry and, as mentioned, promising demographics as a tailwind.

Funeral and interment services are sold in one of two ways: pre-need, or in advance, and at-need, or at the time of death, for those who didn't plan ahead. Park Lawn offers traditional burial (below ground), crypt entombment (above ground) and niches (above-ground storage of urns). These services range in price from $1,000 to $20,000 per unit. The sale of lots and crypts is regulated by the government whereby 15 per cent to 40 per cent of the sale price is placed into a care and maintenance trust. The proceeds of the trust's investment are used to maintain the properties in perpetuity.

Park Lawn also offers cremation (which is the more affordable option to burial) and funerals (ranging from $1,600 to $15,000). Crypt sales are the biggest contributor to revenues, at about 25 per cent of estimated 2014 sales (which should be about $20-million).

In terms of profitability, a $10,000 cemetery lot sale earns a gross profit of $4,000. A $16,000 crypt would yield a $5,600 gross, the company says. Cremation profit margins are 65 per cent while funeral services have margins of 90 per cent. Like I said, this is a good business. It's also a cash cow, with many of the big costs being either non-cash (such as cemetery plots and crypts, which were built or acquired years ago) or prepaid, such as care and maintenance, which is paid from the yield on the trust fund. So cash flow is considerably higher than accrued earnings.

Competition is limited by regulatory matters and real estate (cities are reluctant to zone for cemeteries). Park Lawn, with 40 years of inventory, has a solid asset base with which to generate profitable revenue and a good platform with which to acquire and consolidate, which a healthy stock price will make easier. Large competitors include Arbor and Service Corp. International. There are still lots of mom-and-pop operators, too, but increasingly, their children don't want to carry on the family business.

In terms of immediate organic growth, Park Lawn is building a new $18-million mausoleum at its Westminster location in Toronto. The mausoleum will have 3,200 new crypts that should produce a total of $17-million of gross profit or a return of 20 per cent, according to the company. This one investment alone would increase cash flow by up to 35 per cent. Park Lawn is planning new mausoleums for two other Toronto cemeteries as well, which would also add to cash flow and could propel dividends higher. (The current dividend yield is 3.8 per cent.)

Besides organic growth, the company will continue to acquire. More than 70 per cent of this industry is not owned by large corporations.

Insiders own about 6 per cent of Park Lawn's stock and four large institutions own another 50 per cent, so the stock is not liquid, which is perfect for retail investors who bid carefully because if and as the company grows and the stock becomes more liquid, bigger buyers will start piling in.

The company's policy is to pay a dividend but also keep its powder dry for acquisitions, treating investors to both income and growth.

So yes, this is not a sexy story, but as I've learned, it's usually the boring ones that make you the most money.

Disclosure: The author owns shares in Park Lawn.

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