By Brian Bolan
I recently had the pleasure of celebrating the 100th birthday of my grandmother back home in Cleveland, OH. She has been in a care facility for the last 8 years and it has dramatically improved her health and probably extended her life. This all made me think of the relative future, and the aging baby boomer population.
Just prior to leaving for home, I was informed by my coworker Tracey Ryniec that there was a start up dot com funeral business from Cleveland that was getting press in another publication. After being on the site for just a few moments, an IM message was asking me if I needed help... I was looking to meet up with the founder and lo and behold- it was one of them on the IM. We set up a time to talk when I was home.
The business, eFuneral, is based in Cleveland OH. It provides a service to people that are really struggling at a difficult time. Loss of family or a friend is rarely if ever fully expected, so pulling it all together to arrange a funeral and all that comes with it can be difficult. Prepping for it can make the process much easier, especially to those of us who do not want to waste time and money.
Over coffee I spoke with Mike Belsito about start ups; I shared some experiences from when I was working for a private equity firm investing in dot coms and Mike shared some of his marketing ideas with me.
Service Corp. (SCI) was one of the names that jumped right to mind here. As a Zacks #2 Rank (Buy) stock, we know that the earnings estimates are going to be trending higher. I also see that the company has a great history of beating the number and providing a positive earnings surprise. In fact, the company has seven beats in its last eight reports and the other report was an earnings meet.
Estimates for SCI have been moving higher over the last year. The Zacks 2012 earnings estimate climbed 10% throughout the year, moving from $0.70 in January to the current level of $0.77. The 2013 estimate has risen from $0.76 to $0.82 over the same time period.
Being the 800 lb. gorilla in the space, the company's valuation metrics tend to skew the industry average. The stock is trading at 18x trailing twelve months earnings, which is higher than the 16x industry average. The forward PE is also showing a slight premium to the industry average. Where things tend to level off is the more conservative measure of price to book (2.1x for SCI vs 3.8x industry average) and price to sales (1.2x for both SCI and the industry average).
Another funeral service provider is Zacks #3 Rank (Hold) Stewart Enterprises (STEI). This stock has slipped to a #3 recently, but has held a #1 (Strong Buy) or a #2 (Buy) rank throughout most of the year.
The company has topped the Zacks Consensus Estimate in each of the last two quarters, posting beats of 44% and 22%, respectively. Prior to those beats, the company had missed in each of the last four quarters.
Estimates have moved around quite a bit for 2012. The year started with a $0.43 estimate and that number slid to $0.39 in May. It has since recovered to the current level of $0.44. The picture for 2013 was much better, with estimates starting the year at $0.48 and moved to $0.49 in May; it currently stands at $0.51.
STEI trades mostly in line with the industry averages. The 16.6x trailing PE is slightly higher than the 16x industry average, while the forward PE of 14x is at a slight discount to the 14.6x industry average. Price to book of 1.4x is well below the 3.8x industry average and like SCI, STEI trades in line with the industry average for price to sales at 1.2x
Both of these companies could see margin pressure from the likes of eFuneral or other information providers. eFuneral surveyed over 1,000 funeral homes in 11 different metropolitan markets throughout the U.S. Based on that research, the company has created the eFuneral Price Index to act as a market specific guide on funeral costs in that market. Over a dozen line item costs are covered - along with averages and ranges. You can find the report on the eFuneral website.
Another name that Mike talked about marketing to, hoping to help prepare families for the inevitable, was in the longer-term care space. The Ensign Group (ENSG) falls into that space and currently carries a Zacks #2 (Buy) rank. eFuneral is not seen as a competitor to ENSG, but looks to get some potential clients from long-term care providers.
Its recent earnings report was a beat, and while it was a positive earnings surprise, investors were not really stunned by that development. It marked the 11th straight positive earnings surprise by the company, but since the surprise was only a penny, or 1.6% compared to the previous quarter, which saw an $0.08 or 13.5% surprise, the stock fell 5% in the session following the release.
Estimates have moved higher for ENSG throughout the year, starting at $2.15 and rising to $2.51 at the current time for 2012. The same could be said of 2013, with estimates moving from $2.34 to $2.69.
The valuation picture for ENSG is a good one, with the company trading at attractive levels. The trailing PE of 11.4x is lower than the 12.9x industry average, and the forward PE carries a similar discount. The price to book multiple of 1.8x is in line with the industry average. The price to sales multiple of 0.7x is the only indication of a premium valuation, as the industry average is a low 0.4x.
Being prepared for the inevitable is my mom's job for my grandmother. But I can help my mother with eFuneral. No doubt that as the site grows and offers new services, it will be even more useful to millions of people.
In that same vein, being a prepared investor can help prevent massive losses by following the Zacks Rank and paying close attention to where the competition is coming from.