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1 Defensive Small-Cap Stock to Buy and Hold Forever

Park Lawn Corp. (TSX:PLC) is a low-tech growth firm with a wide moat that just doesn’t get the respect it deserves from investors. As the only TSX-listed stock to play the death industry, shares don’t have the scarcity premium that you’d expect. Given the company’s growth prospects, defensive nature, and its fairly predictable earnings stream, shares are actually so cheap that it’s absurd.

Why? Maybe it’s because of the morbid nature of the whole business. But it’s partially due to the fact that the company doesn’t receive much coverage from analysts because of the relatively small ~$580 million market cap.

Although death is not something we want to think about, we all know that it’s inevitable, and given surging populations, one can only expect the number of deaths and the implied demand for death care services will soar as time progresses.

Park Lawn’s moat is easy to overlook

The company offers a wide range of death care products and services, including cemetery lots, crypts, funeral, and cremation services. Such services can either be purchased on a pre-need basis or at the time of death (at-need basis).

Canadian investor Kevin O’ Leary once said that there are two events in which a prospective buyer would not care about the price they’ll end up paying for a good (or service): marriage and death.

With Park Lawn, many grieving clients who require at-need services are, more often than not, less concerned about the price of products they’re paying. This means, clients on an at-need basis will likely be more willing to pay a premium price tag for various products and services versus a client that’s better able to shop around for value if services were arranged on a pre-planned basis.

Thus, for clients on an at-need basis (~75% of funeral home services are at-need), Park Lawn is able to command a higher gross margin. And with limited alternatives available, Park Lawn possesses a fairly large amount of pricing power than many investors would think.

A very profitable growth-by-acquisition story

Not only is Park Lawn able to ride the tailwind of ageing population demographics, but the company has been growing at a rapid rate through the accretive acquisition of cemeteries and funeral home properties all across North America.

The death care industry remains extremely fragmented, so the growth ceiling is high, and with Park Lawn’s expertise, there are substantial synergies to be had from each deal that’s made. Thanks to accretive M&A activity, Park Lawn has been able to grow its adjusted EBITDA by a whopping ~74% year over year as of Q1 2018.

Bottom line

Given the defensive nature of the industry, the company has a rock-solid cash flow stream and the capacity to increase its dividend at an above-average rate while keeping its payout ratio relatively low. At the time of writing, Park Lawn has a 1.9% yield that’s sustainable and may be poised to grow more consistently than in the past.

With shares down ~10% from all-time highs, I think long-term earnings-growth investors seeking above-average gains ought to treat the dip as a buying opportunity. The stock trades at a pricey 27.2 times forward earnings, but given the company’s profound growth profile and its low-risk defensive nature, I think the stock is much cheaper than other stocks that possess similar traits.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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