Over the past six months, Carriage Services’s shares (currently trading at $37.10) have posted a disappointing 13.5% loss, well below the S&P 500’s 8.4% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Carriage Services, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Carriage Services Will Underperform?
Even with the cheaper entry price, we’re swiping left on Carriage Services for now. Here are three reasons why CSV doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Carriage Services grew its sales at a weak 3.6% compounded annual growth rate. 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 relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 10.4%, below what we’d expect for a consumer discretionary business.
3. New Investments Aren’t Moving the Needle
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
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 see the value of companies helping consumers, but in the case of Carriage Services, we’re out. Following the recent decline, the stock trades at 10.6× forward P/E (or $37.10 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Carriage Services
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