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Social-Distancing Norms Mar Funeral Services Industry Outlook

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The Zacks Funeral Services industry comprises companies that offer deathcare products and services in the United States. Firms in this space sell cemetery property as well as related products and merchandise including caskets; cemetery interment rights; burial vaults; garments; and stone and bronze memorials. Further, these companies possess funeral service locations, cemeteries, funeral service/cemetery combination locations and crematoria.

Let’s take a look at the industry’s major themes:

  • Although the outbreak of COVID-19 has resulted in increased deaths in the United States, cemeteries and funeral homes are bearing the brunt of social-distancing related limits on the gathering size at funerals. Incidentally, social distancing has largely reduced the scope of other funeral-related services. Some families are even planning to hold memorial events after the situation stabilizes. Cumulatively, these have been denting revenues of industry players. Also, lower social in-person interaction at funerals is a threat to pre-need revenues – which are vital for funeral services players.
  • Rising demand for cremation over traditional funerals has hurt revenue per client in the funeral services space. Cremation costs significantly less than traditional funeral, with the average cremation service cost being roughly $2,500. In fact, we note that the pandemic has fueled this trend, with families choosing cremations over the elaborate traditional funerals – which include caskets and burials.
  • Availability of funeral-related products on the e-commerce platform and use of environment-friendly alternatives for burials are quite a threat to industry participants as well. Evidently, consumers are choosing shrouds and woodland burials over coffins and graveyards, while tech advancement is increasing the popularity of video tributes. Apart from this, demand for the industry’s services is dependent on seasonal factors and is usually higher in winters given the rise in cases of influenza and pneumonia.
  • While the funeral services industry is unpleasant by nature, the inevitability of death keeps demand for its services intact. Thus, industry players are likely to benefit from high mortality rates and an aging baby boomer population. In this regard, the entire funeral process that involves embalming as well as use of caskets, vehicles, funeral staff and equipment among others acts as a significant revenue source for industry participants.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Funeral Services industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #209, which places it in the bottom 15% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming less confident about this group’s earnings growth potential. Since the end of January 2020, the industry’s consensus earnings estimate for the current year has slumped 23.7%.

Let’s look at the industry’s performance and current valuation.

Industry Underperforms S&P 500 and Sector

The Zacks Funeral Services industry has lagged the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.

The industry has declined 19.8% over this period against the S&P 500’s growth of 4.6%. Meanwhile, the broader sector has lost 12.7% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staples stocks, the industry is currently trading at 16.47X compared with the S&P 500’s 21.5X and the sector’s 18.76X.

Over the past five years, the industry has traded as high as 23.78X and at the median of 18.13X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Though coronavirus has led to increased deaths, the resultant social distancing has limited funeral size and scope, proving detrimental to the industry players. Also, consumers’ increasing preference for cremation services as well as competition from cheaper sources keeps funeral services companies under pressure. Nonetheless, with death being inevitable – steady demand for funeral services keeps the industry going. Also, the aging baby boomer population presents solid opportunities.

Some of the prominent picks from the industry include Service Corporation International (SCI - Free Report) and Hillenbrand, Inc. (HI - Free Report) , with a Zacks Rank #3 (Hold) each. Further, Carriage Services, Inc. (CSV - Free Report) and Matthews International Corporation (MATW - Free Report) carry a Zacks Rank #4 (Sell) at present.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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