Critical Moves Set To Boost Future Earnings And Streamline Operations

Key Takeaways

• The significant growth in preneed cemetery sales hints at an expanding future revenue stream, signaling positive future earnings impact for Carriage Services.
  
• Implementing a new supply chain strategy and disciplined capital allocation indicates efforts toward cost reduction and sustainable growth, aiming to boost net margins and operational efficiency.
  
• Strategic objectives, CFO search, preneed sales reliance, and nonrecurring expenses pose risks to Carriage Services' financial performance and growth.

Catalysts

Provides funeral and cemetery services, and merchandise in the United States.

• The significant increase in preneed cemetery sales by 31.1% indicates a growing future revenue stream for Carriage Services, impacting future earnings positively as this segment expands further.
  
• The continued execution of the funeral home pricing strategy, resulting in an increased funeral average revenue per contract by $212 or 4%, indicates a tactical approach to enhancing margin per service, which can directly benefit net margins.
  
• The introduction and expected phased impact of a new supply chain strategy to improve merchandise options and leverage scale for increased savings could reduce costs, thereby improving net margins and earnings over the next few years.
  
• The amendment to the credit facility with a reduction in near-term interest expense reflects an improvement in financial health and operational efficiency, which can enhance earnings per share by reducing financial burdens.
  
• The operational focus on disciplined capital allocation and purposeful growth, as evidenced by investments back into the business and expected divestiture of non-core assets, positions the company for sustainable growth and improved operational efficiency, potentially leading to higher revenue and earnings.

Assumptions

• Analysts are assuming Carriage Services's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $58.8 million (and earnings per share of $3.55) by about September 2027, up from $29.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2027 earnings, down from 17.2x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Risks

• The dependence on the success of its 5-year strategic objectives for future financial performance could pose a risk if these objectives are not met, potentially impacting future revenues and earnings.
  
• Anticipated slight decline in volume due to the pull-forward effect could negatively affect total funeral home operating revenue, impacting net margins if the increase in average revenue per contract does not sufficiently offset volume declines.
  
• The ongoing search for a CFO and the criticality of this role in driving long-term strategic growth plan forward could introduce risks if the right candidate is not found or if there’s a delay, potentially affecting strategic execution and financial planning.
  
• The company's reliance on preneed cemetery sales for growth, which are collected over time, could pose a risk to cash flow if these sales do not materialize as expected or if there’s a downturn in the market.
  
• Increased overhead costs, particularly noted in the quarter due to nonrecurring expenses related to the strategic review process and executive severance, if not carefully managed, could impact overall profitability and net margins.

Valuation

• The analysts have a consensus price target of $39.25 for Carriage Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $423.9 million, earnings will come to $58.8 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $32.95, the analyst's price target of $39.25 is 16.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.