Revitalised Strategy And Project Trinity Propel Growth In High-Margin Sectors

Key Takeaways

• Strategic initiatives in preneed cemetery sales are bolstering future growth, helping boost revenue with a strong foundation in a high-margin segment.
  
• Efficient pricing and supply chain strategies improve margins, while disciplined capital allocation and debt reduction enhance net income and growth potential.
  
• Strategic shifts and cost pressures, along with debt reduction focus, could constrain Carriage Services' short-term revenue growth and financial flexibility.

Catalysts

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

• Carriage Services' strategic initiatives in preneed cemetery sales have resulted in a robust revenue increase of 35.7%, indicating a strong foundation for sustained future growth in this high-margin segment, which is expected to continue boosting their revenue.
  
• The company's funeral home pricing strategy has effectively increased the average revenue per contract by 2.6%, despite a slight decrease in total contract volume, indicating an ability to grow margins through efficient pricing strategies.
  
• Implementation of a revised supply chain strategy focused on refining merchandise options is expected to lead to significant cost savings, contributing to improved net margins beginning in 2025.
  
• The focus on disciplined capital allocation and debt reduction, illustrated by a lowered leverage ratio from 5.3x to 4.3x, positions Carriage Services to reduce interest expenses, thus enhancing their net income and freeing up capital for potential growth opportunities.
  
• Ongoing investments in Project Trinity, expected to complete by early 2025, aim to enhance operational efficiencies and customer experience, leading to overhead efficiencies post-implementation and supporting improved earnings.

Carriage Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carriage Services's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.5% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $62.8 million (and earnings per share of $3.88) by about November 2027, up from $34.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2027 earnings, down from 16.8x today. This future PE is lower than the current PE for the US Consumer Services industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 2.02% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Carriage Services Future Earnings Per Share Growth

Risks

• The closure of two businesses, including a cremation business and a facility in Buffalo, New York, resulted in lost volume, which could impact overall revenue negatively if similar closures occur in the future.
  
• Projected overhead costs related to new initiatives, such as Project Trinity, leadership development, and continued education, could impact net margins if these costs do not lead to effective returns.
  
• The company's shift towards preneed cemetery sales, which have a slower cash conversion cycle, has already led to a decrease in cash flow compared to the prior year, potentially impacting liquidity and overall financial flexibility.
  
• While organic growth has been strong, there are notes of economic uncertainty, including discretionary spending declines ahead of elections, which could adversely affect revenue projections if consumer behavior shifts.
  
• The company is currently focusing on paying down debt, which constrains its ability to engage in M&A activities until 2025, potentially stunting revenue growth opportunities in the short term.

Valuation

• The analysts have a consensus price target of $43.75 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 $467.8 million, earnings will come to $62.8 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $37.97, the analyst's price target of $43.75 is 13.2% 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.