Acquisition is the only growth vector as you can’t just acquire new customers at will

Park Lawn Corporation is a leading funeral, cremation, and cemetery provider in Canada. The company provides pre-need, at need, funeral services, burial plots, memorialization, interment, crypts, cremation, and afterlife celebration services. It has two operating segments – the U.S. (~83% of 2019 revenues) and Canada (~17%).

Park Lawn and its subsidiaries own and operate businesses including cemeteries, crematoria, funeral homes, chapels, planning offices, and a transfer service. Few of its businesses include The Signature Group, Parkland Funeral Holdings, Citadel, Cress, Providence Funeral Homes, etc. It owns 114 cemeteries, 109 funeral homes and 39 crematoria businesses. Park Lawn has a presence in markets with dense populations such as Toronto, Denver, St. Louis, Nashville, Houston, New York/New Jersey, as well as in Mississippi, Kentucky, North Carolina. It operates in five Canadian provinces and 15 U.S. states.

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Revenue Growth & Market Exposure

Park Lawn earns a majority of its revenue from funeral homes (~80%) and cemeteries (~20%). The company sells products and services on a pre-planned basis (pre-need) as well as at the time of a death (at-need). About 65% of its cemetery business sold is preneed. As the fastest growing company in the industry in North America, Park Lawn has grown from six cemetery properties in Toronto to a diverse portfolio of properties and businesses operating across North America. The company’s pre-arranged funeral contracts are currently valued at $1.1 billion.

The company’s revenues grew by ~45% YoY. Its businesses located in markets such as Colorado, Michigan and New Jersey experienced an overall increase in at-need services associated with the pandemic. However, pre-need cemetery revenue was down during the quarter due to lockdown. Park Lawn is growing both organically and through acquisitions. It is well-positioned to meet the evolving needs of its customers. The company is introducing a new funeral and cemetery technology solution targeted towards margin expansion and improving operational efficiency.

Park Lawn’s revenues have grown at a rate of 30% CAGR in the last decade. Its acquisitions of Family Legacy and Harpeth Hills in January 2020 is expected to generate $22.5 million in revenue by the end of the year.

Dividends

Park Lawn pays a current monthly dividend of $0.038 per share. The company has been paying dividends each month since January 2011. Park Lawn has a high dividend payout ratio as well as a modest yield of 1.6%. Park Lawn’s dividend per share has declined from CA$0.66 in 2010 to CA$0.46 last year. Its EPS has also declined by more than 9% CAGR in the last decade.

Park Lawn operates in an industry characterized by high barriers to entry such as government regulation and zoning approvals. The after-life care industry is recession-proof. As the baby boomer generation ages, the death rate is expected to increase to 9.7 deaths per 1,000 in 2045. Park Lawn is favorably placed to benefit from the favorable population demographics, driven by the aging of Baby Boomers born between 1946 and 1964. Cremation and memorialization services continue to increase in demand as the number of COVID cases increase. The company is targeting $100 million in adjusted EBITDA by 2022 through strategic bolt-on acquisitions (contribution of $35 million), organic growth ($10-$12 million), and margin expansion ($7-$8 million). It spent $180 million on acquisitions in the last year. Given the uncertain impacts of COVID-19, capital expenditure is on hold unless deemed necessary.

The Family Legacy and Harpeth Hills acquisitions are expected to drive $5.8 million in EBITDA by the end of the year.

Competition

The death care industry is a highly-fragmented market. Park Lawn competes with the likes of Service Corp. International, Foundation Partners, Carriage Services, Northstar Memorial Group, Independent Operators, and other regional consolidators. Independent Operators is one of the largest competitors owing and operating nearly 89% of funeral homes in the U.S. and Canada. However, Park Lawn’s low leverage, a strong balance sheet, and appetite for acquisition provide it an edge over the competition. It is the No.1 player in cremations in Toronto, conducting more than 50% of cremations performed in the market. The current crisis situation continues to restrict the size and number of funeral services.

Bottom Line

Park Lawn continues to expand operations through opportunities in key markets. An aging population across North America provides a favorable demographic advantage to the company and it plans to continue its acquisition growth strategy through a robust M&A pipeline and a strong balance sheet. Park Lawn is a fast-growing company with solid fundamentals and a wide competitive moat. Though the company’s dividend yield is modest, it boasts of a long dividend payment history.

Dividend Adjusted Chart by StockRover.

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