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Are shares of InvoCare Limited (ASX:IVC) a buy?

Australia’s largest funeral operator InvoCare Limited (ASX: IVC) has seen its share price hit a 52-week low of $11.31 during Tuesday’s trading session. The last time InvoCare has traded at these levels was in February 2016. Monday’s trading update confirmed the softness in funeral case volume outlined in the first half of 2018 has continued into the second half and has seen the company’s share price break the previous low of $11.40 in May.

With the share price hovering around 52-week lows, is it time for investors to buy shares in InvoCare?

A softer market

InvoCare confirmed that the number of deaths in the Australian market has fallen by 5.9% in the June to August period in comparison to the prior corresponding period. Furthermore, the company has estimated that deaths during September have declined by an even greater margin.

The unusual industry conditions will have a negative impact on the company’s full-year earnings as a declining market reduces InvoCare’s ability to increase prior case average prices.

The company has estimated that for every 1% decline in the number of deaths, InvoCare will see a $3 million fall in annualised funeral revenue and a $0.7 million revenue fall in its Cemeteries and Crematoria division. The net result is 2,000 fewer cases up till the end of September over the prior period for comparable business, which translates to a $17 million shortfall in revenue.

The fall in revenue should be partially offset from the number of acquisitions the company has embarked on recently in expanding its operating network. These acquisitions are forecast to contribute around $25 million on an annualised basis. InvoCare has also managed to increase its market share in the Australian market despite current trading conditions and the ongoing disruption from the Protect & Grow strategy.

Foolish takeaway

Current consensus estimates for FY18 revenue for InvoCare is $477 million with earnings per share of 54.31 cents. These numbers may come down over the coming weeks as analysts adjust their expectations. At current prices, the stock trades on a forward multiple of around 21.

It’s been a difficult 2018 for shareholders in the funeral industry with both InvoCare and rival Propel Funeral Partners Ltd (ASX: PFP) underperforming the broader market. The sector will benefit from a demographic tailwind over the next couple of decades and is trading at a far more compelling valuation than in recent memory. However, there is a risk of a further reduction in the company’s valuation multiple in the near-term, and until a bottom is formed I’m inclined to wait on the sidelines.

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia has recommended InvoCare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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