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Funerals, auto parts among latest top stock list changes

Emma Rapaport  |  06 Jun 2018Text size  Decrease  Increase  |  
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Ideas bubble

The addition of this multi-national funeral home operator and removal of two other companies are among the changes to Prem IconMorningstar's Best Stock Ideas list for June 2018.

Wide-moat-rated Invocare (ASX: IVC), a global operator of funeral homes, cemeteries and crematoria, is in the midst of a major reinvestment cycle. This has seen a significant number of its stores closed and a drop in sales.

However, Morningstar analysts believe this disruption is short term only with a positive outlook over the medium- to long-term. Invocare's sales were down about 6 per cent in the first quarter of 2018, relative to the prior corresponding period, and earnings are anticipated to be around 12 per cent down for the half, says Morningstar equity analyst, Daniel Ragonese.

"However, improvement is expected in the second half, driven by higher case prices, cost savings, the impact of refurbished and new stores coming on line, and acquisitions.

“Upon completion of the current reinvestment program, the firm should be in a much stronger position to continue increasing its share of the steadily growing funeral services market," he says.

Ragonese view the recent sell-off as an "opportunity to invest in a high-quality stock at a significant discount to our fair value estimate.”

Upon the reopening of the refurbished facilities, Morningstar expects high single-digit earnings per share growth to resume, and this pace to continue over the medium term.

The key earnings drivers include an annual death rate that is growing by between 1 per cent and 2 per cent each year, incremental market share gains, and annual price growth of around 3 per cent – slightly ahead of inflation.

Why it holds a wide moat

The firm’s competitive advantages stem from its intangible brand assets as well as cost advantage.

“We believe the strong branding, reputation, and in many cases regional monopolies will allow InvoCare to continue raising prices ahead of inflation, while building on its leading one-third share of the Australian market,” Ragonese says.

Invocare is currently trading at $13.20, approximately 15 per cent below Morningstar’s fair value estimate of $15.50.

Narrow-moat-rated Bapcor (ASX: BAP) and narrow-moat-rated Contact Energy (ASX: CEN-NZ) have both been removed from the Best Ideas List. Following recent share price appreciation, Bapcor stock is now trading at close to Morningstar's fair value estimate, and Contact Energy’s recent share price strength has narrowed the discount to Morningstar’s unchanged fair value estimate.

The Prem IconBest Stock Ideas list now includes 10 companies including MYOB Group (ASX: MYO), Domino's Pizza Enterprises (ASX: DMP) and G8 Education (ASX: GEM)

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Emma Rapaport is a reporter for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is an editor for Morningstar.com.au

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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