Carriage Services Inc. (CSV) April 13, 2015tippie.biz.uiowa.edu/henry/reports15/CSV_sp15.pdfCarriage Services Inc. (CSV) April 13, 2015 Consumer Discretionary – Funeral Homes Industry

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Liana Tamakloe [[email protected]]

Carriage Services Inc. (CSV) April 13, 2015

Consumer Discretionary – Funeral Homes Industry Stock Rating BUY

Investment Thesis Target Price $28-$32 The funeral home business is a relatively stable revenue business model. Although growth in the market is expected to be just about 1.1%, CSV is well positioned with its restructured debt structure to take advantage of acquisition opportunities, as this is the key source of growth for funeral home businesses. For these reasons we recommend a buy for CSV with a 27% upside potential. Drivers of Thesis

The baby-boomers generation is aging and are expected to fuel the growth of the population age group of 65 years and above. This age group makes up 72.5% of all deaths annually.

Growth in the industry is achieved through acquisitions and CSV is well positioned to perform this task at it restructured its debt obligations and generated more cash and extended the maturity of obligations.

With a beta of 0.62, the death care industry is a fairly stable revenue generation industry whose demand will not alter drastically according to economic cycles.

Risks to Thesis

Cremations provide about one-third the revenue generated through traditional burials. As the percentage of cremation funerals rise, revenues in the death care industry will be negatively affected. Percentage of cremation funerals is expected to be 70.6% by 2020 from 46.7% currently.

Life expectancy from 2012 to 2013 has not seen any significant improvement. But with the recent enactment of the PPACA and improved healthcare and health technology, the number of deaths will decrease, albeit not very significantly.

Henry Fund DCF $39.76 Henry Fund DDM $25.85 Relative Multiple $19.88 Price Data Current Price $23.66 52wk Range $15.25 – 25.20 Consensus 1yr Target $27.67 Key Statistics Market Cap (M) $437.6 Shares Outstanding (M) $18.495 Institutional Ownership 55.4% Beta 0.62 Dividend Yield 0.4% Est. 5yr Growth 19% Price/Earnings (TTM) 27.8 Price/Earnings (FY1) 15.2 Price/Sales (TTM) 1.70 Price/Book (mrq) 2.16 Profitability Operating Margin 17.16% Profit Margin 6.73% Return on Assets (TTM) 1.93% Return on Equity (TTM) 9.02%

Earnings Estimates

Year 2012 2013 2014 2015E 2016E 2017E

EPS $0.63 $1.06 $0.86 $1.10 $1.16 $1.17

growth 65.8% 68.3% (18.9)% 28.4% 5.0% 1.1%

12 Month Performance Company Description

Carriage Services Inc. is a Funeral Homes Company headquartered in Houston Texas, providing funeral and cemetery goods and services to bereaved families. The company operates 165 funeral homes in 27 states and 32 cemeteries in 11 states, serving clients on both at need and on a preneed basis. Carriage operates mostly in suburban and rural locations where it competes mostly with smaller independent operators and has expanded by acquiring these operations and running a decentralized framework.

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13.2

1.9 4.9

20.1

1.5

22.1

11.5

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25

P/Sales ROE EV/EBITDA

CSV Industry Sector

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A M J J A S O N D J F M

CSV S&P 500

Source: Yahoo Finance

Source: Factset

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EXECUTIVE SUMMARY

The Funeral Homes industry is a highly fragmented market with many operators and only 3 publicly listed companies. These companies together generate only 14% of the total revenues in the market. Carriage Services is the second largest operator with 1% market share. Recent trends towards using cremations for burials has negatively impacted earnings causing forecasted industry earnings to grow at only 1.1% from 2014 to 2019, this is because cremations generate a third of the revenue that is generated from traditional burials. To generate revenue therefore, large market operators resort to acquisitions to achieve revenue growth.

The main driver for this industry is deaths, the majority of which comes from death of the age population 65 years and above. This age group also are the main target market for preneed funeral and cemetery sales. In 2020, the total percentage of this age group is estimated to be 17% of the population increasing from a current 15%.

Carriage Services has been in operation for over 20 years and generates growth from acquisitions based on its Strategic Acquisition Model which it has developed and implemented successfully. In the fiscal year, it restructured its outstanding debt obligations which would allow it to execute its acquisitions with more cash, at a cheaper average cost of debt and not worry about debt principal repayments.

Cremations, which generally generate one-third of the revenue generated by traditional burial is expected to increase to about 70% of all industry funeral contracts by 2020, up from about 47% currently.

The combination of these industry factors, together with improvements in operational and financial characteristics being implemented by CSV, leads us to a conclusion of a hold for CSV even though it represents about 27% upside in stock price at a target price of $29.87.

COMPANY DESCRIPTION

Carriage Services Inc. (‘Carriage’) is a publicly traded funeral homes company that provides death care services to persons and bereaved families solely in the United States. The company operates along two main segments, the Funeral Home Operations which

contributed 77% of the total revenue in 2014, and Cemetery Operations accounting for the remaining 23% of revenue.

Source: CSV 2014 10-K

Carriage Services was established in 1991 by Melvin Peyne (6% ownership), who currently heads the company as its Chief Executive Officer and Board Chairman. Carriage has grown to 165 funeral homes in 27 states and 32 cemeteries in 11 states, mostly through acquiring and partnering with the finest independent funeral service operators in the suburban and rural areas in which it competes.

Funeral Home Operations

The Funeral Homes segment is the largest contributor to revenue and this revenue is mostly generated from services offered and to a lesser extent sale of merchandise. Services provided by the funeral home operations include transportation of remains, removal and preparation, visitation and religious services, and consultation prior to and after death.

The funeral homes operations is primarily a service business that offers its services for both traditional burial and cremation funerals. In 2014, 51.7% of the funeral services were by traditional burial, with the remaining 47.3% funerals with cremations. This is an increase in the percentage of services performing cremations compared to 43.2% in 2010. Cremations generally cost about one-third the cost of a traditional funeral which is estimated to be about $8,3431 on average, nationally. The table below shows the cost breakdown of a traditional funeral.

77%

23%

Revenue

Funeral

Cemetery

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2012 - National

Item Median

Price

Non-declinable basic services fee $1,975 Removal/transfer of remains to funeral home $285 Embalming $695 Other Preparation of the body $225 Use of facilities/staff for viewing $400 Use of facilities/staff for funeral ceremony $495 Hearse $295 Service car/van $130 Basic memorial printed package $150 Subtotal without Casket $4,650 Metal Casket (Avg. charge for most frequently purchased item)

$2,395

TOTAL WITH CASKET $7,045 Vault (Avg. charge for most frequently purchased item)

$1,298

Total with Vault $8,343 Source: National Funeral Directors Association website

To make up for the lost revenue due to cremations costing less, Carriage promotes the sale of other merchandise such as caskets and urns which are high margin items. For same store operations in 2014, the number of cremation contracts handled by Carriage increased 1.3%, yet the percentage of cremation contracts with services, for which merchandise items are sold increased to 32.5% of all cremation contracts, up from 32.3% in 2013. Even though the total number of contracts decreased by 1.2% in 2014, the average revenue per contract increased by 0.6% offsetting the decrease. This is attributable to the additional revenue derived from sale of merchandise. In our forecast therefore, we did not project a significant effect of the changing structure of traditional burial to cremation on the revenues of Carriage.

Carriage provides its funeral services on an at-need and preneed basis. In 2014, 81% of funeral contracts were provided at-need and the remaining 19% on preneed basis. The major determinant that drives customers’ decisions on choice of funeral service is consumers’ disposable income. Per capita disposable income for the US is projected to increase at an annual average of 2.5% per year from 2014 to 2019. Total revenues for the Funeral Homes industry is projected to increase at an average 1.1%2 during the same period. Taking both of these factors into consideration, we projected same

store revenue for Carriage to increase at an average 1.5% per year for our forecast period to 2019. Furthermore, the age population of 65 years and above are the main sources of preneed funeral revenues. This age group is projected to grow at an average 3.4% and therefore, we forecasted our growth in preneed commissions to grow at a similar rate.

Growth in business for Carriage has been fueled by the volume of acquisitions made by the company year on year. IBIS World December 2014 report on the Funeral homes industry projects the number of operators to grow at an annual 1.1% a year. Assuming no divestitures in the forecast period and a bases acquisition of 2 funeral homes in 2015, we forecasted annual acquisitions to increase by 1.5% over the number of funeral homes in the previous year, and forecasted revenue from acquired funeral homes as a multiple of acquisitions and average acquired funeral home revenue of $967,000.

Cemetery Operations

The remaining 23% of Carriage’s revenue is generated by the cemetery operations. This revenue is generated from interment services, sale of rights to interment in cemetery sites and sale of cemetery related merchandise such as vaults and memorials.

In 2014, preneed cemetery services accounted for 48% of cemetery revenue whereas the remaining 52% was from services provided at-need. For the preneed contracts, amounts collected upon sale of preneed contracts are deposited into a preneed cemetery merchandise and services sales trust. The amount deposited varies by state but ranges between 50% - 100%, and the remainder recognized as revenue. Upon delivery of the merchandise or performance of the service, the principal and income accrued in the trust is withdrawn and recognized as revenue. Some states require about 10% of the sales of preneed cemetery rights to be deposited into a perpetual care trust, proceeds from which will be used to maintain the cemetery facility.

Same store cemetery revenue is generally driven by the number of deaths in the population and volume of preneed cemetery sales achieved. The proportion of the population aged 65 years and above are again the main customers of preneed cemetery sales. The US Census Bureau projects that the percentage of this age bracket

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in the population will grow from 15% of the total population in 2014 to 17% in 20153. This age group is estimated to make up 72.5% of all deaths in the US. At an estimated annual growth of 3.4% per year for this section of the population, we forecast our growth in same store revenue to grow at a similar rate.

Business Strategy

Carriage Services prides itself in being a leader in the markets in which it operates and attributes this success to the careful balance of the three main pillars of its business strategy discussed below:

Standards Operating Model Carriage strives to run a decentralized operations that emphasizes local leadership and entrepreneurship within the market where the funeral home or cemetery is located. To drive this principle, managers are allowed autonomy in the management and decision-making of their various units. Performance standard therefore is not set by corporate level targets to which each unit subscribes as in a ‘budget and control’ model. Rather, standards focus on market share, people, operating and financial metrics peculiar to the specific location, allowing managers to modify operations to fit the nature of the locality and ensuring delivery of personal high-value business. These standards are referred to in the company as “Being the Best”. In the case where a funeral home or cemetery is acquired, management team retention is handled on a case by case basis. Important to carriage however is the willingness of the seller to relinquish control of his business. Where there are individuals with extensive knowledge of the local market that would be valuable in handling local relationships, the individual(s) is (are) retained to tap on their local expertise. Many businesses however that come on the market for sale are being sold because the previous owners are retiring and have no succession plans in place and would thus require the services of a company like Carriage to continue the legacy in the local community.

4E Leadership Model The entrepreneurial spirit of Carriage’s business is based on the 4E leadership principles developed by Jack Welch during his time at General Electric. These principles are Energy to get the job done Energize others to work

Edge to make difficult decisions Execute to generate results.

The company focuses on engaging managers who it believes bear the qualities desired on these four principles and employs these principles in its hiring, training and development functions to ensure teams are motivated and equipped to generate productive results.

Strategic Acquisition Model Carriage services recognizes that to drive revenue and growth, it must acquire strategic businesses to grow its business base and increase revenue. To effectively perform this function, it ranks potential acquisition targets on a criteria based on market share, size of market, competitive standing, demographics, strength of brand, volume and price trends. These criteria have been developed based on correlation between performances of its business on a five to ten year basis in the target market.

Taken together, all these models ensure independence of individual funeral home operations to modify aspects to meet specific local needs, with broad capital and systems support from the parent company to drive growth. To further encourage managers to perform exceptionally, compensation bonuses have been structured to reward managing partners who are able to achieve an annual compound growth of 2% and more over a five year period, so that they receive 4x – 6x their annual bonuses. This five-year variable bonus program which was started in 2012 is known as the “Good to Great” incentive plan. It is our opinion that this system allows a high level of responsibility for performance results and drives the revenue and earnings capability of CSV’s business units.

RECENT DEVELOPMENTS

Strategic Business Acquisitions

The Funeral Homes industry is made up of many fragmented individual operations. Heavy regulations prevent new entrants from breaking into the industry, meanwhile a shift in preference to cremations limit industry revenues. To generate revenue growth therefore, major market players tend to acquire independent operations. Carriage Services in 2014

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completed acquisition of 6 businesses from Services Corporation International (SCI) following SCI’s acquisition of Stewart Enterprises, formerly the second largest operator in the industry after SCI. The divestiture was required by the Federal Trade Commission as part of its regulatory procedures. These consisted of 4 businesses in New Orleans, Louisiana, and 2 in Alexandria, Virginia. In 2014, the company reported a 6.1% increase in revenue which it attributed mainly to its acquired businesses.

In February 2015, Carriage acquired the Neal-Tarpley-Parchman Funeral Home in Clarksville, Tennessee. This acquisition increases CSV’s footprint in the Tennessee region as it is known more as a traditional funeral market. As the traditional contracts generate more revenue compared to cremations, this acquisition is advantageous for CSV. The map below shows a graph of where CSV primarily operates in the US. Interesting observation in the map is that CSV is located in the densely populated areas of the Southeast where traditional burials are preferred and many people move to the area at retirement, and in the Great Lakes and Mid-Atlantic Regions where the areas are densely populated. The map below provides an overview of areas where Carriage operates funeral homes and cemeteries. The company’s operations are divided up into three main areas, the East Coast, the Mid-South and the West Coast.

Source: CSV Q1 2015 Investor Presentation

New Financing Strategy

In 2014, Carriage Services refinanced its $90million 7% convertible junior subordinated debt with $143.8million

2.75% convertible subordinated debt which is due in 2021.

Additionally, the company entered into a Fifth Amendment of its current credit facility which yielded two results; firstly it was able to extend its revolving credit line from $125million to $200million and secondly was able to generate a new term loan of $125million with a maturity in 2019. Both facilities are priced at Libor + 250bps. The company reports that at the end of December 2014, the average weighted interest rate on those facilities was 2.8%. Important characteristics of the convertible subordinated notes include:

Subordinate in right of payment to all existing and future senior debt

Matures in 2021, unless converted or purchased via tender by carriage; no call provision

Conversion is limited to less than 20% of outstanding shares at the time of issue, ie. Dilution limited to 19.99%

Stock price of carriage will have to be about $54 approximately $54

The combined effect of these changes to its financing structure is in two-fold, it was able reduce its weighted average cost of debt financing, and also generate more financing to cater to its acquisition strategy.

Source: Company & Investment Profile, CSV 2015

Reported 2014 Annual Results

The year 2014 was a good year for Carriage as it recorded record earnings and performance. In 2014, total revenue increased by 6.1% to $226.1million from the previous year. This yielded an increase in adjusted consolidated EBITDA margin of 27.1% with EBITDA of $61.7million, representing a 10.1% increase over that of 2013. This resulted in a diluted EPS of $1.34 and an ROE of about 14%.

The company upon releasing these results adjusted its rolling four quarter outlook for the 2015 financial year, forecasting 2015 revenue to be between $244m - $248m, with EPS estimated to be $1.55 - $1.59. Analysts’

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estimates for the stock puts revenue forecast to be $244m - $246m with EPS estimated to be $1.55 - $1.57. Our model on the other hand forecasts EPS for Carriage at $1.10 in 2015, growing steadily to $1.34 at the terminal year of 2019.

INDUSTRY TRENDS

Consolidation

The Funeral home industry is a highly fragmented one with the major players accounting for only 14% of industry revenue and the remaining 86% distributed amongst small, independent, usually family-owned businesses. According to the National Funeral Directors Association, there were an estimated 19,486 funeral homes in the country in 2014. Regulation by the Federal Trade Commission, individual state governments and environmental laws is generally not prohibitive to enter into the market. The percentage of the population aged 65years and over is also expected to increase to about 17% of the total population by 2020. This age bracket forms about 72.5% of total deaths which is a main driver for revenues in the industry. However, irrespective of these positive conditions, industry revenue is expected to grow at an average annual rate of 1.5% to $17.2b in 2019, and the increase in industry participants is forecasted to be 31,183 in 2019 representing an annual growth of 1.1%. The low projections in revenue and industry participants is as a result of an increase in demand for cremations as opposed to traditional burial services. Cremations are estimated to cost about one-third the cost of traditional funerals, with costs ranging between $570 and $1500.

Opportunities for existing businesses to grow revenues is therefore very limited, and thus they have turned to acquisitions to grow revenue base and consequently earnings. The 3 publicly traded industry participants have been involved in extensive M&A activities. Notable transactions include SCI’s acquisition of Keystone North America Inc. in 2010 (then the 5th largest player) and Stewart Enterprises Inc. in 2013 (then the 2nd largest player). For CSV, its notable past acquisitions were 6 businesses in California and Florida (very lucrative locations for its growing population including old-age persons) in 2010 and the recent acquisition of 6 businesses from SCI in 2014. StoneMor Partners LP

(STON), the 3rd of the listed participants also more recently acquired 12 cemeteries and 9 funeral homes in 2014, and 17 funeral homes and 5 cemeteries in 2012. Evidently, growth by acquisitions is the main strategy for these market players, and thus a well-structured acquisition program will lead to success.

Considering the fact that revenue growth projections still remain low and the increase in popularity of cremations as a choice of burial/disposal of remains, we anticipate to see more consolidations in the industry within the forecast period.

Popularity of Cremations

Cremation as a means of parting with bereaved family members has gained popularity in recent years. As shown in the graph below, cremation rates have increased from just 3.6% in 1960 to about 46.7% in 2014. This figure is estimated to reach 70.6% of all burials by 2030 as depicted in the graph below. This trend is being fueled by the cheaper cost of cremation which is about a third of the cost of traditional funerals. Also, another cause for the increased demand for cremations is the environmental impact of the chemicals used in embalming and making caskets. Furthermore, religious restrictions against cremations are not as strong as before and more families are choosing simpler ceremonies and cremations offer this advantage. As estimated, we also expect the percentage of burials being cremations to increase because recent data testifies to the increased demand for cremations and the driving force for the choice of cremations is expected to persist and possibly increase in the future.

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Cremation Rate

Source: National Funeral Directors Association website

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MARKETS AND COMPETITION

The Funeral Homes industry draws its demand mainly from the death of the population 65 years and older. This age bracket represent about 72% of all deaths recorded in the US each year. Besides death, revenue in the industry is influenced by consumers’ preferences for traditional burials as against cremations and also disposable income as it influences choice of type of burial and the suite of services that will be purchased in addition to the main burial.

The industry experiences some level of seasonality as deaths during the cold wintery months are higher due to the adverse weather conditions of the time. Generally however, this is an industry that is fairly sustainable because death is a surety of life and so no matter the circumstances, people will demand funeral services. There is no threat of obsolescence of the underlying service being offered.

The largest proportions of costs for this industry is mainly generated by wages and purchases. Purchases for the industry include caskets, embalming materials, cremation materials, memorials, urns, flowers etc. These purchases are about 45.9% of total industry costs, followed closely by wages which represent about 22.5% of costs. Other costs incurred include utilities, rent, SGA and marketing expenses. The graph below shows a comparison on the industry cost as against costs for the discretionary sector.

INDUSTRY COSTS COMPARISON

Source: IBIS World, Funeral Homes Industry, December 2014

Being a highly personal service industry, a company’s reputation goes a long way in determining the success of the establishment. For this reason, many of the operators are family-owned businesses and even when acquired by the larger operators such as in the case of carriage, the unique personality of the business known in the community is maintained. The relationship between the community and the owners and managers of the business drives growth in business contracts. For CSV, where a brand is locally strong, the brand is maintained to preserve business viability. Other success factors for this industry is the ability to leverage employees and other pool services such as transportation to reduce costs. Businesses in the same locality can share services and resources. Visibility in a high traffic area also drives business growth as it serves as a means of subtle marketing. Location in this industry is also an important factor. Firms located in the Southeast benefit from a market place that prefers traditional burials to cremations. In the south also, the warmer weather attracts retirees and thus increases the target market population. In the Mid-Atlantic and Great Lakes regions, the location offers good prospects also as these are also densely populated areas in the country. The map below shows the states of the US with their respective percentage of funeral home establishments in the country. The orange areas have 3% - 10% of funeral homes, whereas the gray areas have less than 3% of establishments. The orange areas are characteristic of dense populations and is therefore not surprising they contribute the most percentage of funeral homes. The earlier map of CSV’s business locations shows that it has operations in the west (CA), the south (TX), east coast and the Great Lakes and parts of the Mid-Atlantic region. These areas, especially the South east, West and south west where carriage may be found, are also noted for preference for traditional burials as against cremations, and thus presents good business prospects for CSV.

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FUNERAL HOMES DENSITY IN THE US

Source: IBIS World, Funeral Homes Industry, December 2014

The market is not heavily concentrated in any one or few participants. The publicly traded market players have a collective market share of 14% with the remaining 86% in the hands of individual fragmented businesses. The main differentiators and sources of competition is appearance of the funeral home. People gravitate towards well-kept locations such as parlors and cemetery grounds. In the recessionary period, price was a strong basis for competition but with rising incomes, this is slowly losing its competitive urge in some markets. Having a combination funeral home and cemetery provides a cost advantage as the business can compete and cost. Having a crematory included in the business set up also allows one to provide a full suite of services and help in maintaining its client base in the long run. Finally, a well-established preneed program allows the business

to generate a healthy backlog of revenue for future periods.

Barriers to entry in the industry are moderate. Regulation is sufficiently high. In addition to regulation by the Federal Trade Commission, businesses are subject to state laws, environmental laws, licensing of businesses and key personal such as funeral directors and embalmers, and registrations and restrictions regarding preneed programs. Other barriers that restrict entry include the ability of existing industry players to vertically integrate into the downstream supply chain of the business, especially through acquisitions. An established reputation is a driving force to generating business contracts and a new entrant will face an uphill task trying to compete with existing operators who have relationships with members of the community.

Peer Comparisons

The publicly traded Funeral Homes companies in the US 3 in number: Carriage Services, Service Corporation Int. and StoneMor Partners LP.

StoneMor is a listed limited partnership, also known as a Master Limited Patnership that enjoys the tax benefits that accrue to partnerships but is able to access financing from the capital markets. In light of this, it is required to pay dividends which will be taxed once at the individual level. Due to constant payment of dividends, it has a high dividend yield at 8.6% compared to its peers. It however has negative earnings which makes some levels of comparisons impractical.

Between CSV and SCI, the former is better priced at a P/E of 15.2, which is lower than that of SCI and has a higher forecast EPS at 1.56. Additionally, it generates 6.73% net margin compared to 5.7% for SCI and a comparable operating margin of 17.16% compared to SCI’s 18.65%.

Source: Factset, April 2015

Company Ticker Mkt Cap P/E(ntm) EPS (’15) Div. Yield

(%)

Net Profit Margin

(%)

Debt Ratio (%)

ROE (%) Operating Margin (%)

Carriage Services CSV 437.6M 15.2 1.56 0.4 6.73 33.82 9.02 17.16

Service Corporation Int.

SCI 5,461M 21.8 1.22 1.5 5.7 25.85 12.24 18.65

StoneMor Partners LP

STON 8858.4M - (0.23) 8.6 (3.69) 16.92 (6.56) 5.6

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Other comparable metrics between these three main players are highlighted in the table below:

CSV STON SCI

Total Rev. FH ($m) 163 49 1921 Total Rev. Cem. ($m) 49 240 1074 # of FH 164 98 1559 # of Cem. 32 303 466 Source: Companies 2014 10-K

A number of issues to note from the table above is that SCI is clearly a very large competitor in the industry. It has operations in foreign markets as well and therefore has a good source of constant business demand. At the end of 2014 in estimated its backlog of funeral contracts to be worth $9.3bn. CSV on the other hand, had a backlog 82842 contracts to be satisfied in the future for funerals and given average revenue per funeral service indicated in its 2014 10-K as $5,239, this backlog translates to $434mn of future revenue. STON is clearly more a cemetery operator as it has over 3x more cemeteries than funeral homes. In 2014, it indicated that it performed 50,566 burials whereas CSV performed 31,402.

ECONOMIC OUTLOOK

Disposable Income

Disposable Income influences consumers’ decisions with regards to choices for funeral services. In times of decreasing disposable income, consumers will opt for less costly funeral options such as cremations as against traditional burials which generate more revenue for funeral homes. Additionally, consumers will rather spend on present need than purchase preneed funeral rights and services in times of decreasing disposable income. IBIS World estimates increases in disposable income to average 2.5% annually from 2014 to 2019. From the graph below, disposable income is estimated to increase at 4% in 2015, likely fueled by the lower energy prices which started falling mid-year in 2014. The growth in disposable income then slows to 2.8% in 2016. In light of this occurrence, we forecasted same store funeral revenue which forms the greater percentage of CSV’s income to grow at 1.5% in the forecast period because even with an increase in disposable income presently, evidence suggests that consumers are saving this excess

income as there has not been an increase in spending commensurate with the estimated increase in income.

Source: Wells Fargo, US Economic Forecasts, 2015

Aging Population

As indicated in the foregoing discussions, the percentage of the population aged 65years and above make up over 72% of the total deaths in the US. This proportion of the population also make up the target market for preneed funeral and cemetery sales. Currently, this portion of the population makes up about 15% of the total US population. In 2020, it is estimated that this age group will grow to make up about 17% of the population. This age group is expected grow to about 24% of the total population. This is due to the aging of the baby boomers of which the first group turned 65 in 2011. The graph below demonstrates the change in age composition of the population from 2014 to 2060.

FORECAST POPULATION PERCENTAGES BY AGE GROUP

Source: US Census Bureau, March 2015

In addition, the general growth in the population will feed into the older age bracket in later years. As shown

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Growth in Real Disposable Income

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in the graph below, the total population in the US in 2012 is expected to increase to 420m in 2060 from 314m people.

Source: US Census Bureau, February 2013

It is important to note however that the growth in the size of the population is expected to be slower than has been experienced in previous years. Taking account of increases in the population of persons aged 65 years and over, we forecasted preneed funeral commissions by 3.4% per year and the also increased same store cemetery revenue by the same rate.

Life Expectancy

Life expectancy in the US has been increasing over time. As depressing as it sounds, a shorter life expectancy of the population means more demand for the funeral care industry and thus more revenue for CSV. For 1955, life expectancy at birth was 69.6 years, in 1995, this had increased to 75.8 years, 77.9 years in 2005, 78.5 years in 2009 and currently about 78.8 years. A study revealed that improvements in life expectancy is attributed to advances in medicine and the public health system, and more importantly improved treatments of cardiovascular diseases. The life expectancy in future years will improve as healthcare laws have been enacted to make basic healthcare more accessible to the population. Additionally, medical science keeps improving in pursuit of finding treatments for diseases. However, the rate of improvement in life expectancy will not be as dramatic as has been experienced in recent decades because the current life expectancy of 78.8 years is fairly old and increases in age becomes less rapid.

CATALYSTS FOR GROWTH

The main revenue driver in for this business is death and all the factors that cause, or lead to death. Those conditions that will lead to increased death and therefore increased growth for the business include: (a) an expanding size of persons aged 65 years and older who contribute to about three-quarters of deaths in the population, and this age group which makes up about 15% of the population is expected to increase to about 17% in 2020 and 24% in 2060; (b) reduced life expectancy at birth, which currently stands at 78.8 years as at 2013 latest figures has been observed to have been unchanged from 2012; (c) improved healthcare and technology, alongside the implementation of the Patient Protection and Affordable Care Act (PPACA) which seeks to increase access to healthcare by the uninsured population will be sure to affect the death rate in the population and conversely the growth rate of business for Carriage.

Additionally, the ability of CSV to generate increased revenues through its Strategic Acquisition Model which has so far yielded positive results will affect growth of the business. More emphatically, the acquisitions in the densely populated areas and those areas that have high death rates will influence business growth.

INVESTMENT POSITIVES

• The percentage of the population age group that contributes the largest number of deaths is expected to increase to about 17% in 2020 from 15% in 2014, primarily fuelled by the aging of the baby boomers generation.

Carriage services generates growth currently mostly through acquisitions. Restructuring its debt obligations in such a way as to prolong the maturity of its debts and increase cash available for acquisitions will go a long way to ensure that CSV is capable of taking advantage of all potential acquisitions that comes its way.

The death care industry is a fairly stable industry whose services will always be in demand and will not change drastically according to economic cycles. It is therefore a good addition to your portfolio as it serves a risk mitigating function.

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INVESTMENT NEGATIVES

• The trend towards cremations will greatly affect the revenues generated by this industry. As the percentage of funerals that opt for cremation increase, revenues will decrease because cremations provide only about one-third of revenues generated through traditional burials. In 2014, the average cremation performed for funerals was 46.7% and this is expected to increase to 70.6% by 2019.

Life expectancy from 2012 to 2013 has not seen any significant improvement. But with the recent enactment of the PPACA and improved healthcare and health technology, the number of deaths will decrease, albeit not very significantly.

VALUATION

Revenue Growth – Revenues were forecasted based on each business segment of the company. For funeral homes, the 4 subdivisions of revenue were each forecasted differently. For same-store, revenue growth was forecast to increase at 1.5% per year. This was based on taking a 100bps haircut of the projected 2.5% increase in disposable income. Number of funeral home operations is expected to increase by 1.1% and so we increased CSV yearly acquisitions at that rate, starting from 2 acquisitions which is the 5-year historical average of annual change in funeral homes for CSV. This then formed the basis for increases in revenue for acquired businesses by increasing revenue for this section by a product of new acquisitions and historical average revenue per funeral home for CSV of $967,000. Preneed insurance commissions was forecast to increase at 3.4% per year representing the rate of increase of persons aged 65 years and above in the total population, and finally funeral trust earnings was estimated to grow at 4.2% per year.

Cemetery same store revenue was projected to grow at 3.4%, the rate of growth of the population aged 65 years and above. This portion forms more than half the earnings for CSV cemetery operations, and it mainly patronized by persons in this age bracket. For acquired cemeteries, revenue increases was a product of new acquisitions and historical average revenue per newly acquired cemetery of $1497,000. Preneed cemetery

trust earnings was forecasted to grow at 1.83% which is the long term view of inflation rate by the Henry Fund, while preneed cemetery finance charges was forecast as 0.32% of same store revenue, reflecting a historical average over the last 5 years.

Field Costs and Expenses (COGS) – Costs of providing funeral home and cemetery services was forecast at 62% of funeral and cemetery revenue each. This was reflective of the average proportion of historical field costs, which has been fairly consistent over the last 5 years for both segments.

Corporate Costs & Expenses – general and administrative costs were also forecast at 12% of total revenues as has been the trend in the past.

Capital Expenditures – Capital expenditures was forecasted to be a product of the growth in revenue in each year and the average change in gross PPE over the historical 5-year period, taking into consideration replacement of infrastructure through depreciation.

Beta – a beta of 0.62 was used in calculating the WACC. This was the Factset beta and was appropriate for this stock as its business model is not expected to vary widely with changes in economic cycles. Funeral services will always be demanded irrespective of the condition of the economy, and so a relatively low beta is acceptable.

Risk Premium & Risk-free Rate - An equity risk premium of 4.85% was used, which is an average of the 87-year Geometric average of stock returns in excess of the 30-year Treasury bond yield, and Damodaran’s monthly equity premium as at March 1, 2015. We believe this is representative of market returns over a wide span evening out effects of such times as the Great Depression of the 1930s, the Dot com bubble and the more recent 2008-2009 recession. In light of taking a long term view of events and estimates, we used the 30-year Treasury bond rate of 2.49% as the risk-free rate also.

Results of Models – Our DCF model generated a year-end target price of $39.86, the DDM a price of $26.52 and a relative P/E valuation of $19.88. Two of our three models provide a positive outlook for the price of CSV, whereas the third values the stock close to the current trading price but lower. In coming up with a target price, we assigned a 40-30-30 weighting to the DCF, DDM and Relative valuation models respectively and came up with a price of $29.91. We therefore are of the opinion that

Page 12

CSV should ideally trade within ±$2 of that price yielding a target price range of between $28 - $32 approximately.

KEYS TO MONITOR

The main drivers for revenue for CSV is fairly predictable, ie. death rates, life expectancy, etc. Those factors that will change our thesis on this company however are more internal. We suggest therefore monitoring firstly the acquisition strategy of CSV and the success rate of these acquisitions. It would be beneficial as growth in the industry is largely through acquiring other funeral homes and cemetery operations.

CSV has issued more debt, and is expected to use part in its acquisition activities. It will be important to check how well the company manages its leverage activities and pays back on its debt, as it will affect its ability to engage in acquisitions.

Operating margins will be another important factor to monitor for CSV. As business volume is not estimated to increase much, a successful funeral home will be one that can effectively balance its range of services and offer more to clients and by so doing charge higher margins to generate revenue.

Finally, in the wider environment, the preference for cremations has been increasing regularly in the last few years. The rate of increase in preference for cremations will impact CSV’s business as cremations generate lower revenues. It will be important to monitor the trend towards opting for cremations in the society.

REFERENCES

1. National Funeral Directors Association http://nfda.org/about-funeral-service-/trends-and-statistics.html#MCACF

2. CSV 2014 10K

3. STON 2014 10K

4. SCI 2014 10-K

5. IBIS World – Funeral Homes Industry Report, December 2014

6. US Census Bureau https://www.census.gov/content/dam/Census/library/publications/2015/demo/p25-1143.pdf

7. CSV Company and Investment Profile 2015

http://files.shareholder.com/downloads/CSV/4042736596x0x816160/C1B3A0A1-50BC-411E-BB9B-1720D5E67B1C/CSV_CIP_-_March_2015_-_FINAL_v.2.pdf

8. CSV Q1 Investor Presentation http://files.shareholder.com/downloads/CSV/4042736596x0x816304/56783EA7-1602-4CC2-B758-1650CBFD3937/CSV_Investor_Presentation_Q1_2015_Final_V2_3.12.15.pdf

9. US Economic Forecasts – Wells Fargo 2015 https://www08.wellsfargomedia.com/downloads/pdf/com/insights/economics/forecast.pdf

10. Medic Daily News – CDC: Life Expectancy in the US

hits record high http://www.medicalnewstoday.com/articles/283625.php

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

http://nfda.org/about-funeral-service-/trends-and-statistics.html#MCACF

http://nfda.org/about-funeral-service-/trends-and-statistics.html#MCACF

https://www.census.gov/content/dam/Census/library/publications/2015/demo/p25-1143.pdf

https://www.census.gov/content/dam/Census/library/publications/2015/demo/p25-1143.pdf





http://files.shareholder.com/downloads/CSV/4042736596x0x816304/56783EA7-1602-4CC2-B758-1650CBFD3937/CSV_Investor_Presentation_Q1_2015_Final_V2_3.12.15.pdf




https://www08.wellsfargomedia.com/downloads/pdf/com/insights/economics/forecast.pdf

https://www08.wellsfargomedia.com/downloads/pdf/com/insights/economics/forecast.pdf

http://www.medicalnewstoday.com/articles/283625.php

http://www.medicalnewstoday.com/articles/283625.php

Carriage Services Inc.

Key Assumptions of Valuation Model

Ticker Symbol CSV

Current Share Price $23.54

Current Model Date 4/3/2015

Fiscal Year End Dec. 31

Pre-Tax Cost of Debt 3.50%

After-tax Cost of Debt 2.69%

Beta 0.62

Risk-Free Rate - 30 Year Treasury 2.49%

Equity Risk Premium 4.85%

CV Growth 2.00%

Current Dividend Yield 0.40%

Marginal Tax Rate 23.03%

Cost of Equity 5.50%

WACC 4.50%

Same Store Funeral Rev. Growth 1.50%

Same Store Cemety Rev. Growth 3.40%

Field Costs and Expenses/Revenue 62.00%

Shares Outstanding 22430


Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

FUNERAL

Same Store 120,576 120,191 119,322 121,112 122,929 124,772 126,644 128,544

Acquired 25,802 33,660 44,930 46,864 49,272 51,716 54,196 56,714

Preneed Funeral Insurance Commissions 1,711 1,853 2,036 2,105 2,177 2,251 2,327 2,406

Preneed Funeral Trust Earnings 5,968 7,378 7,447 7,143 7,324 7,507 7,693 7,882

Total 154,057 163,082 173,735 177,224 181,701 186,246 190,861 195,546

0.0403 0.0474 0.0448

FH Beginning of Year 159 167 161 164 166 168 171 174

FH Acquisitions 10 2 6 2 2 3 3 3

FH Divestitures/Mergers (2) (8) (3) - - - - -

Total FH 167 161 164 166 168 171 174 176

CEMETERY

Same Store 39,902 40,181 41,257 42,660 44,110 45,610 47,161 48,764

Acquired 166 298 1,599 - 1,497 - 1,497 -

Cemetery Trust Earnings 8,506 8,095 8,123 8,272 8,423 8,577 8,734 8,894

Preneed Cemetery Finance Charges 1,518 1,418 1,410 1,032 1,067 1,104 1,141 1,180

Total 50,092 49,992 52,389 51,964 55,098 55,291 58,533 58,838

Cemetery Beginning of Year 33 33 32 32 32 33 33 34

Cemetery Acquisitions 1 - 1 1 1

Cemetery Divestitures (1) (1) (1)

Total Cemetery 33 32 32 32 33 33 34 34

TOTAL REVENUE 204,149 213,074 226,124 229,188 236,799 241,537 249,394 254,384

Revenue Growth Rate 8.78% 4.37% 6.12% 1.36% 3.32% 2.00% 3.25% 2.00%


Income Statement


Revenues:

Funeral 154,057 163,965 173,735 177,224 181,701 186,246 190,861 195,546

Cemetery 50,092 49,992 52,389 51,964 55,098 55,291 58,533 58,838

Total revenues 204,149 213,957 226,124 229,188 236,799 241,537 249,394 254,384

Field Costs & Expenses:

Funeral 93,215 100,410 104,913 109,879 112,655 115,473 118,334 121,239

Cemetery 30,017 28,940 30,852 32,218 34,161 34,280 36,291 36,480

Depreciation & amortization 9,090 10,212 10,545 12,476 12,774 13,314 13,555 14,044

Regional & unallocated funeral & cemetery costs 9,952 10,014 9,806 9,626 9,472 9,420 8,729 7,632

Total costs & expenses 142,274 149,576 156,116 164,199 169,061 172,487 176,908 179,394

Gross profit 61,875 64,381 70,008 64,989 67,738 69,050 72,485 74,991

Corporate Costs & Expenses:

General, administrative & other expenses 22,494 25,922 28,915 27,503 28,416 28,984 29,927 30,526

Home office depreciation & amortization 964 1,456 1,378 1,398 1,444 1,473 1,521 1,552

Total corporate costs & expenses 23,458 27,378 30,293 28,901 29,860 30,458 31,449 32,078

Operating income (loss) 38,417 37,003 39,715 36,089 37,878 38,592 41,037 42,913

Interest expense (17,100) (12,622) (10,308) (9,343) (9,005) (8,616) (8,174) (7,675)

Other income (expense), net (2,068) 81 (6,706) - - - - -

Total interest & other income (expense), net (19,168) (12,541) (17,014) (9,343) (9,005) (8,616) (8,174) (7,675)

Income (loss) from continuing operations before income taxes19,249 24,462 22,701 26,746 28,872 29,976 32,863 35,238

Provision (benefit) for income taxes 7,642 9,277 7,255 6,159.39 6,648.95 6,903.25 7,568.05 8,114.89

Net income (loss) from continuing operations 11,607 15,185 15,446 20,587 22,223 23,073 25,295 27,123

Income (loss) from discontinued operations, net of tax (204) 4,111 392 - - - - -

Net income (loss) 11,403 19,296 15,838 20,587 22,223 23,073 25,295 27,123

Preferred stock dividend 14 4 - - - - - -

Weighted average shares outstanding - basic 18,126 17,826 18,108 18,644 19,171 19,620 19,954 20,022

Net income (loss) per share - basic 0.63 1.06 0.86 1.10 1.16 1.18 1.27 1.35

Dividends declared per share - 0.10 0.10 0.13 0.14 0.15 0.16 0.18

Dividends Paid - 1,783 1,811 2,470 2,667 3,000 3,288 3,526

Dividend Payout Ratio - 0.09 0.12 0.12 0.12 0.13 0.13 0.13


Balance Sheet ('000s)


ASSETS

Cash & cash equivalents 1,698 1,377 413 15,455 13,095 11,296 8,236 622

Accounts receivable - trade, net 17,812 17,950 19,264 19,710 20,365 20,772 21,448 21,877

Assets held for sale 1,466 3,544 - - - - - -

Prepaid expenses 5,107 4,421 4,590 4,813 4,736 4,831 4,988 5,088

Deferred tax assets 1,220 2,779 3,750 3,750 3,750 3,750 3,750 3,750

Inventories & other current assets 7,056 8,825 8,688 11,689 11,840 12,077 12,470 12,719

Total current assets 33,139 36,117 36,705 55,416 53,786 52,726 50,892 44,056

Property, plant & equipment, at cost 236,724 249,317 281,460 298,376 319,217 336,133 356,975 373,891

Less: accumulated depreciation (84,291) (88,627) (95,249) (107,725) (120,499) (133,813) (147,368) (161,412)

Property, plant & equipment, net 152,433 160,690 186,211 190,650 198,719 202,321 209,607 212,479

Cemetery property 75,156 72,911 75,564 76,697 77,848 79,016 80,201 81,404

Goodwill 218,442 221,087 257,442 267,740 278,449 289,587 301,171 313,218

Long-term notes receiveables 49,093 35,687 39,093 40,407 41,764 43,167 44,618 46,117

Total Trust Investments 200,398 207,827 218,249 221,523 224,846 228,218 231,642 235,116

Deferred tax asset 2,220 - - - - - - -

Deferred charges & other non-current assets 9,424 12,280 14,264 14,525 14,791 15,062 15,337 15,618

TOTAL ASSETS 738,085 746,599 827,528 866,958 890,202 910,096 933,467 948,008

9,630 11,137 12,632 14,240 114,041

LIABILITIES & STOCKHOLDERS EQUITY

Current portion of long-term debt & capital lease obligations 11,218 13,424 9,838 10,106 11,614 13,115 14,661 114,429

Accounts payable & other liabilities 18,310 16,985 7,909 9,935 10,064 10,265 10,599 10,811

Accrued liabilities 12,278 12,854 15,203 18,207 18,812 19,188 19,813 20,209

Liabilities associated with assets held for sale 369 4,357 - - - - - -

Total current liabilities 42,175 47,620 32,950 38,249 40,490 42,569 45,073 145,449

Long-term debt, net of current portion 253,311 232,312 266,929 257,299 246,162 233,530 219,290 105,249

Obligations under capital leases, net of current portion 4,013 3,786 3,098 2,622 2,145 1,662 1,241 853

Deferred preneed revenue 103,792 86,067 88,140 105,427 108,927 111,107 114,721 117,017

Deferred preneed cemetery receipts held in trust 153,856 165,485 169,579 174,183 179,967 183,568 189,539 193,332

Care trusts' corpus 45,920 41,893 48,142 50,421 52,096 53,138 54,867 55,965

Deferred tax liabilities - 11,915 36,414 36,414 36,414 36,414 36,414 36,414

Other long-term liabilities - 1,548 2,401 1,801 1,351 1,013 760 570

Total liabilities 603,067 590,626 647,653 666,415 667,552 663,001 661,905 654,849

Redeemable preferred stock 200 - - - - - - -

Common stock 202,683 204,546 212,610 218,981 225,353 231,724 236,184 236,184

Retained earnings (accumulated deficit) (52,598) (33,306) (17,468) 649 20,205 40,279 62,286 85,882

Treasury stock, at cost (15,267) (15,267) (15,267) (19,087) (22,907) (24,907) (26,907) (28,907)

Total stockholders' equity 135,018 155,973 179,875 200,543 222,650 247,095 271,562 293,159

LIABILITIES & STOCKHOLDERS EQUITY 738,085 746,599 827,528 866,958 890,202 910,096 933,467 948,008

from debt schdl. In 10k


Cash Flow Statement

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

NET INCOME 20587 22223 23073 25295 27123

Adjustments

Cashflows from Operations:

Depreciation & Amortization 12476 12774 13314 13555 14044

Deferred Income Tax 0 0 0 0 0

Gross Cash from Operations 33063 34997 36387 38851 41167

Changes In Working Capital Accounts:

Accounts receivable - trade, net -446 -654 -407 -676 -429

Prepaid expenses -223 77 -95 -157 -100

Inventories & other current assets -3001 -151 -237 -393 -250

Accounts payable & other liabilities 2026 129 201 334 212

Accrued liabilities 3004 605 376 624 396

Deferred preneed revenue 17287 3501 2180 3614 2296

Deferred preneed cemetery receipts held in trust 4604 5784 3601 5971 3793

Change in Working Capital 23252 9289 5619 9318 5919

Cash from Operations 56315 44286 42007 48169 47085

Cash from Investing Activities:

Change in Gross PPE -16916 -20842 -16916 -20842 -16916

Change in Cemetery Property -1133 -1150 -1168 -1185 -1203

Change in Goodwill -10298 -10710 -11138 -11583 -12047

Change in Long-term notes receiveables -1314 -1358 -1403 -1450 -1499

Change in Total Trust Investments -3274 -3323 -3373 -3423 -3475

Change in Deferred charges & other non-current assets -261 -266 -271 -276 -281

Change in Assets held for sale 0 0 0 0 0

Change in Cash from Investing -33195 -37648 -34268 -38760 -35420

Cash from Financing

Changes in Current portion of long-term debt & capital lease obligations 268 1508 1501 1546 99768

Changes in Long-term debt -9630 -11137 -12632 -14240 -114041

Changes in Obligations under capital leases -476 -477 -483 -421 -388

Changes in Care trusts' corpus 2279 1674 1042 1729 1098

Changes in Other long-term liabilities -600 -450 -338 -253 -190

Change in Liabilities associated with assets held for sale 0 0 0 0 0

Payment of dividends -2470 -2667 -3000 -3288 -3526

Proceeds from issuance of Common stock 6371 6371 6371 4460 0

Purchase of Treasury stock -3820 -3820 -2000 -2000 -2000

Change in Cash from Financing -8078 -8997 -9537 -12468 -19279

Beginning Cash Balance 413 15455 13095 11296 8236

Change in Cash 15042 -2360 -1799 -3059 -7614

Ending Cash Balance 15455 13095 11296 8236 622


Common Size Income Statement


Revenues:

Funeral 75.5% 76.6% 76.8% 77.3% 76.7% 77.1% 76.5% 76.9%

Cemetery 24.5% 23.4% 23.2% 22.7% 23.3% 22.9% 23.5% 23.1%

Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Field Costs & Expenses:

Funeral 45.7% 46.9% 46.4% 47.9% 47.6% 47.8% 47.4% 47.7%

Cemetery 14.7% 13.5% 13.6% 14.1% 14.4% 14.2% 14.6% 14.3%

Depreciation & amortization 4.5% 4.8% 4.7% 5.4% 5.4% 5.5% 5.4% 5.5%

Regional & unallocated funeral & cemetery costs 4.9% 4.7% 4.3% 4.2% 4.0% 3.9% 3.5% 3.0%

Total costs & expenses 69.7% 69.9% 69.0% 71.6% 71.4% 71.4% 70.9% 70.5%

Gross profit 30.3% 30.1% 31.0% 28.4% 28.6% 28.6% 29.1% 29.5%

Corporate Costs & Expenses:

General, administrative & other expenses 11.0% 12.1% 12.8% 12.0% 12.0% 12.0% 12.0% 12.0%

Home office depreciation & amortization 0.5% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6%

Total corporate costs & expenses 11.5% 12.8% 13.4% 12.6% 12.6% 12.6% 12.6% 12.6%

Operating income (loss) 18.8% 17.3% 17.6% 15.7% 16.0% 16.0% 16.5% 16.9%

Interest expense -8.4% -5.9% -4.6% -4.1% -3.8% -3.6% -3.3% -3.0%

Other income (expense), net -1.0% 0.0% -3.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total interest & other income (expense), net -9.4% -5.9% -7.5% -4.1% -3.8% -3.6% -3.3% -3.0%

Income (loss) from continuing operations before income taxes 9.4% 11.4% 10.0% 11.7% 12.2% 12.4% 13.2% 13.9%

Provision (benefit) for income taxes 3.7% 4.3% 3.2% 2.7% 2.8% 2.9% 3.0% 3.2%

Net income (loss) from continuing operations 5.7% 7.1% 6.8% 9.0% 9.4% 9.6% 10.1% 10.7%

Income (loss) from discontinued operations, net of tax -0.1% 1.9% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0%

Net income (loss) 5.6% 9.0% 7.0% 9.0% 9.4% 9.6% 10.1% 10.7%


Common Size Balance Sheet


ASSETS

Cash & cash equivalents 0.8% 0.6% 0.2% 6.7% 5.5% 4.7% 3.3% 0.2%Accounts receivable - trade, net 8.7% 8.4% 8.5% 8.6% 8.6% 8.6% 8.6% 8.6%Assets held for sale 0.7% 1.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Prepaid expenses 2.5% 2.1% 2.0% 2.1% 2.0% 2.0% 2.0% 2.0%Deferred tax assets 0.6% 1.3% 1.7% 1.6% 1.6% 1.6% 1.5% 1.5%Inventories & other current assets 3.5% 4.1% 3.8% 5.1% 5.0% 5.0% 5.0% 5.0%Total current assets 16.2% 16.9% 16.2% 24.2% 22.7% 21.8% 20.4% 17.3%

Property, plant & equipment, at cost 116.0% 116.5% 124.5% 130.2% 134.8% 139.2% 143.1% 147.0% Less: accumulated depreciation -41.3% -41.4% -42.1% -47.0% -50.9% -55.4% -59.1% -63.5%Property, plant & equipment, net 74.7% 75.1% 82.3% 83.2% 83.9% 83.8% 84.0% 83.5%

Cemetery property 36.8% 34.1% 33.4% 33.5% 32.9% 32.7% 32.2% 32.0%Goodwill 107.0% 103.3% 113.8% 116.8% 117.6% 119.9% 120.8% 123.1%Long-term notes receiveables 24.0% 16.7% 17.3% 17.6% 17.6% 17.9% 17.9% 18.1%Total Trust Investments 98.2% 97.1% 96.5% 96.7% 95.0% 94.5% 92.9% 92.4%Deferred tax asset 1.1% - - - - - - - Deferred charges & other non-current assets 4.6% 5.7% 6.3% 6.3% 6.2% 6.2% 6.1% 6.1%TOTAL ASSETS 361.5% 348.9% 366.0% 378.3% 375.9% 376.8% 374.3% 372.7%

LIABILITIES & STOCKHOLDERS EQUITY

Current portion of long-term debt & capital lease obligations 5.5% 6.3% 4.4% 4.4% 4.9% 5.4% 5.9% 45.0%Accounts payable & other liabilities 9.0% 7.9% 3.5% 4.3% 4.3% 4.3% 4.3% 4.3%Accrued liabilities 6.0% 6.0% 6.7% 7.9% 7.9% 7.9% 7.9% 7.9%Liabilities associated with assets held for sale 0.2% 2.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Total current liabilities 20.7% 22.3% 14.6% 16.7% 17.1% 17.6% 18.1% 57.2%

Long-term debt, net of current portion 124.1% 108.6% 118.0% 112.3% 104.0% 96.7% 87.9% 41.4%Obligations under capital leases, net of current portion 2.0% 1.8% 1.4% 1.1% 0.9% 0.7% 0.5% 0.3%Deferred preneed revenue 50.8% 40.2% 39.0% 46.0% 46.0% 46.0% 46.0% 46.0%Deferred preneed cemetery receipts held in trust 75.4% 77.3% 75.0% 76.0% 76.0% 76.0% 76.0% 76.0%Care trusts' corpus 22.5% 19.6% 21.3% 22.0% 22.0% 22.0% 22.0% 22.0%Deferred tax liabilities 0.0% 5.6% 16.1% 15.9% 15.4% 15.1% 14.6% 14.3%Other long-term liabilities 0.0% 0.7% 1.1% 0.8% 0.6% 0.4% 0.3% 0.2%

Total liabilities 295.4% 276.0% 286.4% 290.8% 281.9% 274.5% 265.4% 257.4%

Redeemable preferred stock 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Common stock 99.3% 95.6% 94.0% 95.5% 95.2% 95.9% 94.7% 92.8%Retained earnings (accumulated deficit) -25.8% -15.6% -7.7% 0.3% 8.5% 16.7% 25.0% 33.8%Treasury stock, at cost -7.5% -7.1% -6.8% -8.3% -9.7% -10.3% -10.8% -11.4%Total stockholders' equity 66.1% 72.9% 79.5% 87.5% 94.0% 102.3% 108.9% 115.2%

LIABILITIES & STOCKHOLDERS EQUITY 361.5% 348.9% 366.0% 378.3% 375.9% 376.8% 374.3% 372.7%


Value Driver Estimation


NOPLAT

Revenues 204149 213957 226124 229188 236799 241537 249394 254384

Less:

Field Costs & Expenses 142274 149576 156116 164199 169061 172487 176908 179394

Corporate Costs & Expenses 23458 27378 30293 28901 29860 30458 31449 32078

Implied Interest on Operating Leases 410 602 573 520 520 520 520 520

EBITA 38417 37003 39715 36089 37878 38592 41037 42913

Less Adjusted Taxes:

Earnings Before Taxes 19249 24462 22701 26746 28872 29976 32863 35238

Current Provision for Income Taxes 3712 -1194 1960

Marginal Tax Rate 19.3% -4.9% 8.6% 23.0% 23.0% 23.0% 23.0% 23.0%

Income Tax Provision 7642 9277 7255 6159 6649 6903 7568 8115

Interest Expense -3298 616 -890 -2149 -2071 -1982 -1880 -1765

Other Income (Expense) -399 -4 -579 - - - - -

Implied Interest on Operating leases 79 -29 49 120 120 120 120 120

Adjusted Taxes 11417 8635 8773 8428 8840 9004 9568 10000

Add Change in Deferred Taxes:

Deferred Tax Liability - 11915 36414 36414 36414 36414 36414 36414

Deferred Tax Asset 3440 2779 3750 3750 3750 3750 3750 3750

Net Deferred Taxes -3440 9136 32664 32664 32664 32664 32664 32664

Change in deferred taxes 3590 12576 23528 0 0 0 0 0

NOPLAT 30590 40944 54470 27661 29038 29588 31469 32913

INVESTED CAPITAL

Net Operating Working Capital :

Normal Cash 1698 1377 413 309 262 226 165 12

Receivables, net 17812 17950 19264 19710 20365 20772 21448 21877

Inventories & other current assets 7056 8825 8688 11689 11840 12077 12470 12719

Prepayments 5107 4421 4590 4813 4736 4831 4988 5088

31,673 32,573 32,955 36,521 37,202 37,906 39,070 39,696

Accounts payable & other liabilities 18310 16985 7909 9935 10064 10265 10599 10811

Accrued liabilities 12278 12854 15203 18207 18812 19188 19813 20209

30588 29839 23112 28143 28876 29454 30412 31020

Net Operating Working Capital 1085 2734 9843 8378 8327 8452 8658 8676

Net PPE 152433 160690 186211 190650 198719 202321 209607 212479

Cemetery property 75156 72911 75564 76697 77848 79016 80201 81404

Deferred charges & other non-current assets 9424 12280 14264 14525 14791 15062 15337 15618

PV of Operating Leases 17210 16369 14851 17159 17885 18209 18865 19123

Operating L-T assets 101790 101560 104679 108381 110523 112286 114403 116145

Obligations under capital leases, net of current portion 4013 3786 3098 2622 2145 1662 1241 853

Deferred preneed revenue 103792 86067 88140 105427 108927 111107 114721 117017

Care trusts' corpus 45920 41893 48142 50421 52096 53138 54867 55965

Other long-term liabilities 0 1548 2401 1801 1351 1013 760 570

Operating L-T Liabilities 153725 133294 141781 160271 164519 166920 171589 174404

Invested Capital 101583 131690 158952 147139 153050 156138 161079 162896

RETURN ON INVESTED CAPITAL (ROIC)

NOPLAT 30590 40944 54470 27661 29038 29588 31469 32913

Invested Capital t-1 83348 101583 131690 158952 147139 153050 156138 161079

ROIC 0.37 0.40 0.41 0.17 0.20 0.19 0.20 0.20

FREE CASH FLOW (FCF)

NOPLAT 30590 40944 54470 27661 29038 29588 31469 32913

Invested Capital 101583 131690 158952 147139 153050 156138 161079 162896

Δ Invested Capital 18235 30107 27262 -11814 5911 3089 4941 1817

FCF 12354 10836 27207 39475 23127 26499 26528 31097

ECONOMIC PROFIT (EP)

BEG. IC 83348 101583 131690 158952 147139 153050 156138 161079

ROIC - WACC 0.32 0.36 0.37 0.13 0.15 0.15 0.16 0.16

EP 26839 36373 48544 20509 22417 22701 24444 25665


Weighted Average Cost of Capital (WACC) Estimation

Risk Free Rate 2.49%

Market Risk Premium 4.85%

Beta 0.62


Risk Free Rate - 30 Yr US Treasury 2.49%

Corporate Spread - Investment Grade 1.01%

Pretax Cost of Debt 3.50%

Marginal Tax Rate 23.03%

After tax Cost of Debt 2.69%

Equity :

Stock Price $23.5

No. of Shares Outstanding 22430

Market Value (Thousands) $528,002.2

Debt:

PV of Operating Leases 14851.5

Short Term Debt 9838

Long term Debt 266929

Total Value of Debt $291,618.5

Total Value $819,620.66

Equity Weight 64.4%

Debt Weight 35.6%

WACC 4.50%

Cost of Equity (CAPM)

Cost of Debt

Weights


Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 2.00%

CV ROIC 0.20

WACC 4.50%



DCF Model

Free Cash Flow 39475 23127 26499 26528 31097

Continuing Value 1188254

Periods to Discount 1 2 3 4 5

Discounted Free Cash flow 37775 21178 23221 1018682

Sum of Discounted FCF 1100856

Add:

Long-term notes receiveables 39093

Total Trust Investments 218249

Less:

ESOP 13197

Current portion of long-term debt & capital lease obligations 9838

Long-term debt, net of current portion 266929

Obligations under capital leases, net of current portion 3098

Deferred preneed cemetery receipts held in trust 169579

PV of Operating Leases 14851

Equity Value 880706

Shares Outstanding 22430.0

Share Price @ Dec. 2014 39.26

Share Price Today 23.54

EP Model

Invested Capital 158952.5

Economic Profit 20508.7 22417.1 22700.9 24443.6 25665.2

Continuing Value 1027174.9

Periods to Discount 1 2 3 4 5

Discounted EP 19625.7 20528.1 19892.9 881856.8

Sum of Discounted EP 941903.5

Invested Capital 158952

Add:

Long-term notes receiveables 39093

Total Trust Investments 218249

Less:

ESOP 13197

Current portion of long-term debt & capital lease obligations 9838

Long-term debt, net of current portion 266929

Obligations under capital leases, net of current portion 3098

Deferred preneed cemetery receipts held in trust 169579

PV of Operating Leases 14851

Equity Value 880705.9

Shares Outstanding 22430.0

Share Price @ Dec. 2014 39.26

Share Price Today 23.54

Today 4/3/2015

Next FYE 12/31/2015

Last FYE 12/31/2014

Days in FY 365

Days after FYE 93

Elapsed Fraction 0.255

R* 5.07%

Price Today ( 2 months time elapse) $39.76

Target Year-end Price (Dec. 2015) 39.85$


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


EPS 1.10$ 1.16$ 1.18$ 1.27$ 1.35$

Key Assumptions

CV growth 2.00%

CV ROE 9.99%


Future Cash Flows

P/E Multiple (CV Year) 22.9

EPS (CV Year) 1.35$

Future Stock Price 30.99$

Dividends Per Share 0.13 0.14 0.15 0.16

Discounting Periods 1 2 3 4

Discounted Cash Flows 0.13 0.12 0.13 25.15

Intrinsic Value 25.53$

Today 4/3/2015

Next FYE 12/31/2015

Last FYE 12/31/2014

Days in FY 365

Days after FYE 93

Elapsed Fraction 0.255

R* 5.07%

Price Today ( 2 months time elapse) $25.85

Target Year-end Price (Dec. 2015) 26.69$


Relative Valuation Models

EPS EPS Est. 5yr Sales/Share Sales/Share

Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16 2015E 2016E P/E 15 P/E 16

SCI Service Corporation International $26.87 $1.22 $1.35 22.0 19.9 10.0 2.20 1.99 14.98 15.45 1.8 1.7

STON StoneMor Partners LP $29.25 ($0.23) ($0.21) (127.2) (139.3) 13.0 (9.78) (10.71) 11.78 12.66 2.5 2.3

HI Hillenbrand Inc. $30.88 $2.09 $2.37 14.8 13.0 12.5 1.18 1.04 26.62 27.40 1.2 1.1

MATW Matthews International Corp. $52.01 $3.02 $3.41 17.2 15.3 11.0 1.57 1.39 45.12 46.91 1.2 1.1

Average 18.0 16.1 1.7 1.5 Average 1.4 1.3

CSV Carriage Services Inc. $23.54 1.10 1.16 21.3 20.3 0.04 511.0 486.7 12.29 12.35 1.9 1.9

Implied Value:

Relative P/E (EPS15) $ 19.88

Relative P/E (EPS16) 18.62$

PEG Ratio (EPS15) 0.08$

PEG Ratio (EPS16) 0.07$

Relative P/S (2015E) $ 16.83

Relative P/S (2016E) $ 16.36


Key Management Ratios


Liquidity RatiosCurrent RatioCurrent Assets/Current Liabilities 0.79 0.76 1.11 1.45 1.33 1.24 1.13 0.30

Quick RatioCurrent Assets - Inventories/Current Liabilities 0.62 0.57 0.85 1.14 1.04 0.95 0.85 0.22Cash RatioCash & Cash equivalents/Current Liabilities 0.04 0.03 0.01 0.40 0.32 0.27 0.18 0.00

Activity or Asset-Management RatiosTotal Asset TurnoverNet Sales/Avg. Total Assets 0.29 0.29 0.29 0.27 0.27 0.27 0.27 0.27Inventory TurnoverCost of Sales/Avg. Inventory 13.82 18.84 17.83 16.12 14.37 14.42 14.41 14.24

Financial Leverage RatiosDebt RatioLong-term Debt/Total Assets 0.34 0.31 0.32 0.30 0.28 0.26 0.23 0.11Equity MultiplierTotal Assets/Total Equity 5.47 4.79 4.60 4.32 4.00 3.68 3.44 3.23Times Interest EarnedOperating Income/Interest Expense & Fin.

Charges 2.25 2.93 3.85 3.86 4.21 4.48 5.02 5.59

Profitability RatiosGross Profit MarginGross Profit/Net Sales 30.31% 30.09% 30.96% 28.36% 28.61% 28.59% 29.06% 29.48%

Net Profit Margin

Net Income/Net Sales 5.59% 9.02% 7.00% 8.98% 9.38% 9.55% 10.14% 10.66%ROANet Income/Avg. Total Assets 1.62% 2.60% 2.01% 2.43% 2.53% 2.56% 2.74% 2.88%ROENet Income/Avg. Total Equity 2.82% 4.32% 3.42% 4.00% 4.08% 4.06% 4.28% 4.42%

Payout Policy RatiosDividend PayoutDividends/Net Income 0.00% 9.24% 11.43% 12.00% 12.00% 13.00% 13.00% 13.00%

Retention Ratio(Net Income-Dividends)/Net Income 100.00% 90.76% 88.57% 88.00% 88.00% 87.00% 87.00% 87.00%Total Payout(Dividends + Treasury Repurchases)/Net

Income 39.74% 9.24% 11.43% 30.56% 29.19% 21.67% 20.91% 20.37%

39.26 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00%

0.50% 45.90 36.54 29.86 24.86 20.97 17.86 15.31

1.00% 57.03 43.62 34.67 28.29 23.50 19.78 16.81

1.50% 75.60 54.23 41.40 32.86 26.76 22.19 18.63

2.00% 112.77 71.92 51.51 39.26 31.11 25.28 20.91

2.50% 224.47 107.32 68.35 48.87 37.19 29.41 23.85

3.00% -80612.37 213.73 102.05 64.89 46.32 35.18 27.76

3.50% -220.48 -76798.33 203.35 96.95 61.54 43.85 33.24

39.26 2.20% 2.60% 3.00% 3.40% 3.80% 4.20% 4.60%

32.00% 123.09 126.96 131.15 135.71 140.69 146.14 152.15

42.00% 93.78 96.78 100.03 103.56 107.42 111.65 116.30

52.00% 64.47 66.60 68.90 71.41 74.15 77.15 80.45

62.00% 35.16 36.42 37.78 39.26 40.88 42.65 44.60

72.00% 5.85 6.24 6.66 7.12 7.61 8.16 8.75

82.00% -23.46 -23.94 -24.46 -25.03 -25.65 -26.34 -27.09

92.00% -52.77 -54.12 -55.58 -57.18 -58.92 -60.83 -62.94

39.26 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25%

32.00% 116.10 121.98 128.48 135.71 143.81 152.93 163.29

42.00% 88.35 92.91 97.95 103.56 109.84 116.91 124.95

52.00% 60.61 63.84 67.43 71.41 75.87 80.90 86.61

62.00% 32.86 34.78 36.90 39.26 41.91 44.89 48.27

72.00% 5.11 5.71 6.38 7.12 7.94 8.87 9.92

82.00% -22.63 -23.35 -24.15 -25.03 -26.02 -27.14 -28.42

92.00% -50.38 -52.42 -54.67 -57.18 -59.99 -63.16 -66.76

39.26 3.35% 3.85% 4.35% 4.85% 5.35% 5.85% 6.35%

0.17 122.03 114.70 108.14 102.23 96.89 92.04 87.61

0.32 87.98 80.55 74.18 68.64 63.79 59.51 55.69

0.47 67.92 61.12 55.41 50.56 46.38 42.74 39.55

0.62 54.70 48.57 43.51 39.26 35.64 32.52 29.80

0.77 45.33 39.81 35.29 31.54 28.36 25.64 23.28

0.92 38.34 33.33 29.28 25.92 23.09 20.69 18.61

1.07 32.92 28.36 24.68 21.65 19.11 16.95 15.10

39.26 0.99% 1.49% 1.99% 2.49% 2.99% 3.49% 3.99%

0.50% 43.32 35.33 29.41 24.86 21.24 18.30 15.86

1.00% 53.21 41.94 34.08 28.29 23.84 20.31 17.45

1.50% 69.21 51.74 40.59 32.86 27.18 22.83 19.40

2.00% 99.48 67.74 50.30 39.26 31.66 26.10 21.85

2.50% 178.58 98.56 66.30 48.87 37.96 30.47 25.03

3.00% 915.50 182.53 97.71 64.89 47.47 36.66 29.31

3.50% -288.05 1320.61 187.37 96.95 63.50 46.08 35.39

39.26 2.50% 3.50% 4.50% 5.50% 6.50% 7.50% 8.50%

0.50% 205.46 91.22 56.23 39.29 29.24 22.62 17.93

1.50% 205.51 91.21 56.22 39.28 29.23 22.62 17.93

2.50% 205.57 91.21 56.20 39.27 29.22 22.61 17.92

3.50% 205.62 91.20 56.19 39.26 29.21 22.60 17.92

4.50% 205.67 91.19 56.18 39.26 29.21 22.60 17.91

5.50% 205.73 91.19 56.18 39.25 29.20 22.59 17.91

6.50% 205.78 91.18 56.17 39.24 29.20 22.59 17.91

Equity Risk Premium

Same Store Funeral Homes Rev. Growth

Same Store Cemetery Rev. Growth

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Documents

Carriage Services Inc. (CSV) April 13, 2015tippie.biz.uiowa.edu/henry/reports15/CSV_sp15.pdfCarriage Services Inc. (CSV) April 13, 2015 Consumer Discretionary – Funeral Homes Industry