Over the past six months, Carriage Services’s stock price fell to $43.25. Shareholders have lost 7.7% of their capital, which is disappointing considering the S&P 500 has climbed by 10.5%. This may have investors wondering how to approach the situation.
Is now the time to buy Carriage Services, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Carriage Services Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons you should be careful with CSV and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Carriage Services’s sales grew at a weak 5.7% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
Carriage Services has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 12.6%, lousy for a consumer discretionary business.
3. New Investments Aren’t Moving the Needle
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves 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 must improve its returns by generating more profitable growth.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Carriage Services, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 12.7× forward P/E (or $43.25 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.
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