Saturday, May 17, 2008

Death Takes A Holiday At Hillenbrand Inc

Because I could not stop for Death --
He kindly stopped for me.
~ American poet Emily Dickinson (1830 – 1886)

Rising fuel prices, cold weather/warm weather, sub-prime impairments—all commonly used excused for less-than expected share-net earnings. To this list add increasing life expectancy rates.

Hillenbrand Inc (HI-$23.56) said Tuesday that its
second-quarter profits fell about 30 percent from a year ago to $23.3 million, or 37 cents per share, due to separation costs (associated with the recent separation of the Company from Hill-Rom Holdings) and an unfavorable impact of product mix, offset in part by casket price hikes and a return to more 'typical volume of Winter deaths' due to pneumonia and influenza.

Do not go gentle into that good night

Contrary to expectations, the 10Q Detective does not believe that the Batesville, Indiana-based casket maker offers investors stable growth prospects in a "recession-resistant industry."

Unit volume at Hillenbrand was negatively affected by an inventory glut (capacity to make caskets is twice the current demand), for people are living longer.

Competition is hurting sales, too. Even the box retailers are looking to profit by death. Costco Wholesale Corp (COST-$73.27) starting
selling discount-priced coffins—and cremation urns—at its warehouse clubs back in 2004.

Cremations as a percentage of total U.S. deaths have increased steadily since the 1960s, resulting in a contraction in the demand for burial caskets, a contributing factor to lower burial casket sales at Hillenbrand, too.

According to a 2005 Harris Poll survey, the reasons for choosing cremation were: to save* money (30%); because it is simpler, less emotional and more convenient (14%); and to save land (13%).

*[Ed. note. Basic burial services—removal of the body, immediate burial with no funeral service—are competitive in price to basic cremation services, until embalming, casket, memorial service, and/or cemetery service prices are added to burial costs.]

Those who favor cremation tend to be better educated and from household with higher incomes.

The most recent figures from 2007 show that the U.S. cremation rate was approximately 32 percent (about 778,000). Based upon increases in acceptance over the past five-year average, the Cremation Association of North America (CANA) forecasts
a national cremation rate of 43 percent by 2025, with more than 1.4 million cremations taking place annually.

Kn-knockin' on heaven's door
Kn-knockin' on heaven's door
Kn-knockin' on heaven's door

Cremation Footprint

The compounded annual growth rate (CAGR) of deaths (number in millions) in the United States is 0.3 percent, according to company provided statistics.

Management believes it can offset demographics by focusing on cremations, with a recent CAGR of 1.1 percent.

"You just better start sniffin' your own
rank subjugation jack `cause it's just you
against your tattered libido, the bank and
the mortician, forever man and it wouldn't
be luck if you could get out of life alive"
Kn-kn-knockin' on heaven's door.
~ Guns N' Roses ("Knockin' on Heaven's Door") <
youtube video

In FY 2007, the company derived six percent of its $667 million in sales from cremation products.

Looking to offset declining funeral volumes and expand top-line growth, Hillenbrand said it plans to grow its deathcare footprint in cremation services, by hiring both marketers and a team to focus on the cremation business in 2008.

Investors should note, however, that other deathcare providers are not standing still, too. Service Corp Int’l (SCI-$11.12), one of the largest operators of funeral homes and cemetaries, is expanding its cremation products and services, too. In 2007, 41.6% of its comparable funeral services were performed with cremation cases, and the company expects this trend to continue upward in future years.

However, as average gross revenue per unit (not supplied by company) is less for cremation than casket sales (customer add-on merchandising increases revenue/unit), Hillenbrand must demonstrate it can best its average trailing gross margin (three-years) of 41.4 percent through continued improvement in cost management, leveraging customer relationships, and selective acquisitions.

“I am ready to meet my Maker, said English statesman Winston Churchill. “Whether my Maker is prepared for the great ordeal of meeting me is another matter.”

Hillenbrand would probably reply: “just as long as you used one of our coffins!”


Management recently reaffirmed its 2008 guidance of revenue in a range of $668 million to $686 million and earnings of $1.27 to $1.47 a share.

Investment Considerations

Albeit, the shares offer an attractive 3.10% dividend yield, but the price fetches 17.2 times estimated midpoint 2008 EPS, a 32 percent premium to its five-year forward EPS growth rate.

Based on life-expectancy tables, death will not starting working overtime again until about 2019, when the first of us Baby Boomers will kick the bucket.

Rising competition, challenges that accompany lower-margin cremation products—short of a transgenic outbreak of avian flu or a blessing from St. Stephen (patron saint of casket makers)—and limited earnings visibility, we believe Hillenbrand is dead money.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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