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Social distancing means that there are now restrictions on the number of attendees at funerals, which will erode revenue as services become more basic.Peter Power/The Globe and Mail

The stock market meltdown over the past six weeks has included a sector that normally should have provided some shelter from the volatility: death care. Does the defensive nature of the funeral business make the sector an overlooked opportunity during these turbulent times?

Houston-based Service Corp. International has seen its share price fall 27 per cent from its high in mid-February. Hillenbrand Inc., which provides funeral services under the Batesville banner, has seen its stock price fall 38 per cent over a similar period.

And the share price of Toronto-based Park Lawn Corp. Ltd., which is listed on the Toronto Stock Exchange, has fallen nearly 50 per cent.

If there is one thing that should remain relatively constant in good times and bad, it’s death – yet the novel coronavirus pandemic is clearly weighing on the outlook for funeral services.

There are a few reasons.

First, social distancing means that there are now restrictions on the number of attendees at funerals, which will erode revenue as services become more basic. Already, Park Lawn is reporting that the value of its sales has declined by about 7 per cent, even as the number of services holds steady.

Second, so-called “pre-need” cemetery sales – where people pay for their own plots and services in advance – will likely falter with most people stuck at home.

Lastly, mergers and acquisitions activity has ground to a halt amid limited access to capital markets and debt financing. That’s a problem for the acquisition-minded bigger players in the fragmented death-care sector.

Park Lawn, for example, made six acquisitions in 2019, valued at about $180-million, as part of its strategy for expanding into the United States. But the company is now taking a second look at further expansion.

“We will … evaluate our acquisition pipeline and we may defer certain of these opportunities, as our immediate focus is on preserving financial flexibility,” Brad Green, Park Lawn’s interim chief executive officer, said during a conference call with analysts on Tuesday.

But the case for investing in death-care companies right now looks especially interesting: They continue to function as essential services and the business model is essentially recession-proof.

And the impact from the pandemic? If you’re wondering whether deaths associated with COVID-19 will provide an unfortunate boost to death-care revenue, you’re not alone. An analyst asked this very question during the Park Lawn conference call – but the answer is probably no.

“Our volume normally is a very stable industry, and will remain stable,” Mr. Green responded.

Indeed, the number of COVID-19 related U.S. deaths so far (more than 5,100 as of Thursday, according to Johns Hopkins University) is tiny compared with the 2.8 million Americans who died of all causes in 2018, according to statistics from the U.S. Department of Health and Human Services.

Even the recent estimate that as many as 240,000 Americans will eventually die from COVID-19 represents less than 9 per cent of overall annual deaths and coincides with a potentially falling death rate from car accidents (owing to less driving during lockdowns).

But although the pandemic is not a reason for opportunistic investors to pick up death-care stocks, it’s not a reason to avoid them either. Analysts who cover Park Lawn are mostly bullish about the longer-term aspects of the death-care business, which stands to benefit from aging demographics in the United States and Canada.

“The key point Park Lawn investors should consider in the midst of the indefinite timeline [of the] COVID-19 crisis … is that death care is a long-horizon, solid-growth, recession-resistant industry,” Scott Fromson, an analyst at CIBC World Markets, said in a note.

Raymond James analyst Johann Rodrigues pointed out that Park Lawn shares trade at just 10 times this year’s estimated EBITDA (earnings before interest, taxes, depreciation and amortization), down from an average valuation of 14 times EBITDA over the past three years.

“For those with a time horizon that outlasts the virus, we believe adding to current positions could be a gift a year from now,” Mr. Rodrigues said.

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