Park Lawn (TSX:PLC) provides goods and services related to the disposition and memorialization of remains in Canada and the United States. It owns and operates cemeteries, crematoriums, funeral homes, and funeral services businesses.
The company operates primarily in the U.S. and Canada, with the U.S. accounting for the majority of its revenue. The company reports a market capitalization of $838 million with a 52-week high of $30.62 and a 52-week low of $21.79.
Intrinsic price
Based on my calculations, using a discounted cash flow valuation model, I determined that Park Lawn has an intrinsic value of $53.46 per share. Assuming less-than-average industry growth, the intrinsic value would be $44.07 per share, and higher-than-average industry growth would result in an intrinsic value of $68.54 per share.
At the current share price of $29.08, I believe Park Lawn is significantly undervalued. Investors looking to add a funeral company to their TFSA or RRSP should consider buying shares of Park Lawn. I would recommend investors follow the share into 2020 as a bearish market could mean buying shares of Park Lawn at a discount.
Park Lawn has an enterprise value of $1.7 billion, which represents the theoretical price a buyer would pay for all of Park Lawn’s outstanding shares plus its debt. One of the good things about Park Lawn is its leverage, with debt at 10.1% of total capital versus equity at 89.9% of total capital.
Financial highlights
For the nine months ended September 30, 2019, the company reported a strong balance sheet with $7.9 million in retained earnings (down from $10.8 million in 2018). I am not concerned with this decrease, as the company consistently reports strong retained earnings. Investors should be pleased with this figure as it suggests surpluses from the company in the previous years have been reinvested to help fuel growth.
The company engages in an aggressive acquisition-centric growth strategy, and made five acquisitions in 2019 alone: Cress Funeral Service Inc, The Baue Funeral Home Co, Horan & McConaty Funeral Services Inc, and John L. Ziegenhein & Sons Undertaking Inc and Integrity Funeral Care Inc, for total cash consideration of $171 million.
Revenues are up sharply to $163 million in 2019 from $102 million during this period in 2018 (+60%). Given a slight increase in costs, Park Lawn reported gross profits of $142 million for the period (gross profit margin of 87%). Pre-tax net income of $9.1 million, up from $5.4 million in 2018.
The company has a consistent acquisition-growth strategy with $162 million in cash outflows in 2019, down from $230 million in 2018. Further to this, senior management is committed to reducing debt with repayments of $40.1 million in 2019, up from $16.9 million in 2018.
Park Lawn is also a dividend-paying entity with a current dividend yield of 1.57%.
Foolish takeaway
Investors looking to buy shares of a funeral company should look into buying shares of Park Lawn. With positive retained earnings and a management team focused on an acquisition-centric growth strategy complemented by a reduction in debts, investors in Park Lawn will be generously rewarded.
Using a discounted cash flow model, I determined the intrinsic value of Park Lawn to be $53.46 which represents an 84% premium to its current share price of $29.08. Plus, investing in your TFSA means all capital gains will be tax-free!
