Funeral services company Carriage Services (NYSE:CSV) reported Q1 CY2024 results exceeding Wall Street analysts' expectations, with revenue up 8.4% year on year to $103.5 million. It made a GAAP profit of $0.45 per share, down from its profit of $0.57 per share in the same quarter last year.
Carriage Services (CSV) Q1 CY2024 Highlights:
- Revenue: $103.5 million vs analyst estimates of $98.8 million (4.8% beat)
- Adjusted EBITDA: $33.6 million vs analyst estimates of $29.7 million (13.1% beat)
- EPS: $0.45 vs analyst expectations of $0.61 (26.5% miss)
- Gross Margin (GAAP): 36%, in line with the same quarter last year
- Free Cash Flow of $20.9 million, up 63.3% from the previous quarter
- Market Capitalization: $387.5 million
Established in 1991, Carriage Services (NYSE:CSV) is a provider of funeral and cemetery services in the United States.
The company provides personalized services to families experiencing a loss. Carriage Services's offerings include traditional funeral arrangements, cremations, memorial services, and cemetery property sales and maintenance. The company prides itself on offering compassionate care and support, coupled with professional and dignified service.
Carriage Services utilizes a decentralized operating model where it is hands-off regarding the day-to-day management responsibilities of individual funeral homes and cemeteries in its network. Instead, it takes a back seat and supports partners with resources and knowledge of best practices across the larger organization. This strategy has enabled Carriage Services to grow its network effectively through tuck-in acquisitions of independent funeral homes and cemeteries.
To improve efficiency, the company invests in training its staff and adopting new technologies to enhance the customer experience. This includes digitalizing aspects of funeral planning and memorialization, offering online obituaries, and providing live streaming services for funeral services.
Specialized Consumer Services
Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Technology can be a double-edged sword, though, as it may lower the barriers to entry for new competitors and allow them to do serve customers better.
Carriage Services' primary competitors include Service Corporation International (NYSE:SCI), StoneMor (NYSE:STON), Park Lawn Corporation (TSX:PLC), Matthews International (NASDAQ:MATW), and Dignity Plc (LSE:DTY).Sales Growth
Reviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Carriage Services's annualized revenue growth rate of 7.9% over the last five years was weak for a consumer discretionary business. 
Within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Carriage Services's recent history shows the business has slowed as its annualized revenue growth of 1.7% over the last two years is below its five-year trend.
This quarter, Carriage Services reported solid year-on-year revenue growth of 8.4%, and its $103.5 million of revenue outperformed Wall Street's estimates by 4.8%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months, a deceleration from this quarter.
Operating Margin
Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Carriage Services has been a well-managed company over the last eight quarters. It's demonstrated it can be one of the more profitable businesses in the consumer discretionary sector, boasting an average operating margin of 20.8%.
This quarter, Carriage Services generated an operating profit margin of 18.8%, down 3 percentage points year on year.
Over the next 12 months, Wall Street expects Carriage Services to become more profitable. Analysts are expecting the company’s LTM operating margin of 20.7% to rise to 22.4%.EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. 
Over the last five years, Carriage Services's EPS grew 358%, translating into an astounding 35.5% compounded annual growth rate. This performance is materially higher than its 7.9% annualized revenue growth over the same period. There are a few reasons for this, and understanding why can shed light on its fundamentals.
A five-year view shows that Carriage Services has repurchased its stock, shrinking its share count by 15.4%. This has led to higher per share earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.In Q1, Carriage Services reported EPS at $0.45, down from $0.57 in the same quarter last year. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but unfortunately, there is insufficient data.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Over the last two years, Carriage Services has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 15.1%, above the broader consumer discretionary sector.
Carriage Services's free cash flow came in at $20.9 million in Q1, equivalent to a 20.2% margin and down 13% year on year.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Carriage Services's five-year average return on invested capital was 9.6%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Carriage Services's ROIC has stayed the same over the last few years. If the company wants to become an investable business, it will need to increase its returns.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.
Carriage Services reported $1.69 million of cash and $558.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.
With $111.4 million of EBITDA over the last 12 months, we view Carriage Services's 5.0x net-debt-to-EBITDA ratio as safe. We also see its $19.02 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.
Key Takeaways from Carriage Services's Q1 Results
We enjoyed seeing Carriage Services exceed analysts' revenue and adjusted EBITDA expectations this quarter. The stock is up 3% after reporting and currently trades at $26.6 per share.
Is Now The Time?
Carriage Services may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Carriage Services, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last five years, and analysts expect growth to deteriorate from here. And while its EPS growth over the last five years has been fantastic, the downside is its relatively low ROIC suggests it has historically struggled to find compelling business opportunities. On top of that, its projected EPS for the next year is lacking.
Carriage Services's price-to-earnings ratio based on the next 12 months is 10.6x. While there are some things to like about Carriage Services and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $36.75 per share right before these results (compared to the current share price of $26.60).
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