As announced in February's investor presentation and covered in Fairfax media yesterday, ASX-listed funeral operator InvoCare Limited (ASX: IVC) has announced plans to enter the US market.
Estimated to cost US$8 million in total over a three-year 'start up and proving' stage, the recent acquisition of a Californian crematorium is intended to see if InvoCare could expand to capture a larger part of the US market.
Given that two major operators in the US market recently consolidated, InvoCare CEO Andrew Smith was quoted by Fairfax as being optimistic on the opportunities available for smaller players, and the blue-sky potential of the estimated US$18 billion funeral industry.
InvoCare's newly minted US operations began in February this year, and are not expected to break even until the fourth year of operation (2019). However if the entry is successful, InvoCare will have plenty of opportunity to grow both acquisitively and organically.
Given that InvoCare currently trades on a price to earnings (P/E) ratio of around 26, a good deal of growth potential is seemingly priced into the company already, and I would go so far as to say that InvoCare looks quite expensive on the face of its existing businesses, which grew earnings per share by 11.4% in Financial Year (FY) 2014.
Other comparable companies, like Lifehealthcare Group Limited (ASX:LHC), trade on a much lower P/E and offer comparable growth to InvoCare while retaining similar defensive characteristics around demand for their products.
While the US market does have the potential to justify InvoCare's high P/E, it will be several years before the expansion starts to bear fruit and I feel that there is better value to be achieved elsewhere on the ASX in the meantime.
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