A Cause for Concern?

A Cause for Concern?

InvoCare (ASX: IVC) owns and operates funeral homes, cemeteries and crematoria in Australia, New Zealand and Singapore. Over the past decade, the company has grown their net profit after tax by 16 per cent each year. However, in the year to December 2013, InvoCare recorded a flat net profit after tax at $42.5m.

Revenue growth is largely attributable to a consistent 3-4 per cent annual price increase and an approximate 1 per cent increase in the “addressable market”. InvoCare’s revenue for 2013 increased by 4.5 per cent to $385.4 million, and unusually the number of deaths actually declined by 0.8 per cent across the company’s markets. The ability to grow revenues amidst volume declines, illustrates the considerable pricing power that InvoCare commands. Obviously the death rate will fluctuate from period to period, so a lower number of deaths in 2013 should not materially impact InvoCare’s long-run value.

It is worth noting InvoCare’s estimate for deaths in Australia for 2013 was 145,000. Back in 2012, the Australian Bureau of Statistics forecast approximately 150,000 deaths in 2013. The death rate is a key input into analysts’ valuation models and this may need to be revised slightly lower if favourable demographics persist. InvoCare estimates the volume decline impacted net profit after tax by $1.6 million.

Competitive pressures are ever present when a company operates in an industry with a strong capacity for pricing power and volume gains. While InvoCare has historically been able to defend its market share with key acquisitions and innovations in funeral services, the company noted it unusually ceded some share to its competitors in 2013. It is rare for a company to quantify a loss of market share, but such is the visibility of the industry that InvoCare has estimated competitive pressures cost it $2.8 million from net profit after tax.

The combined losses from volumes and market share reduced 2013 net earnings by $4.4m, or 10 per cent. While this is a concern, the underlying fundamentals of the industry remain sound, and InvoCare has affirmed its commitment to innovation. This has been reflected in the share price holding up relatively well post the result – at the current price of $11.26, it is within 10 per cent of its record-high back in May 2013, of $12.49.  InvoCare’s ability to grow earnings historically has afforded the company a share price premium, and while we are not comfortable to invest, it is a company we will continue to monitor.