On Thursday the InvoCare Limited (ASX: IVC) share price was amongst the best performers on the ASX 200 with a 3% gain to $10.56.
This was quite the turnaround for the funeral company because earlier in the day its share price was down 1.3% to a multi-year low of $10.10.
Why was the InvoCare share price at a multi-year low?
InvoCare’s shares have been under significant pressure over the last 12 months due to the sudden deterioration in its performance.
In the first half of FY 2018 InvoCare posted a 7.3% decline in operating earnings after tax to $23.5 million and announced a 5.5% cut to its interim dividend.
It also warned that it may not achieve its full year guidance if the soft market conditions it experienced in the first half continue in the second.
Its hypothetical guidance was for full year operating EBITDA to show a small increase over FY 2017’s result and a mid-single digit decline in operating earnings per share.
Propel’s update advised that continued weakness in funeral market conditions in Australia means that it expects operating net profit after tax to be in line with the prior corresponding period.
It blamed the weakness on the funeral industry cycling through a strong prior corresponding period which included a severe flu season and on below trend funeral volumes this year due to a benign flu season.
Based on Propel’s update, it looks as though conditions have worsened in the second half of 2018. If this proves to be the case then I wouldn’t be surprised if InvoCare downgraded its guidance further.
Should you invest?
Based on management’s guidance, I estimate that InvoCare’s shares are changing hands at 19x forward operating earnings.
I feel this is reasonably expensive for a company that expects to post a mid-single digit decline in operating earnings per share this year.
While it does have defensive qualities and is investing heavily in its future growth, I’d suggest investors hold off an investment until its growth justifies the premium or its shares de-rate to a more appropriate level.
Until then I would look elsewhere in the consumer discretionary sector at a share such as IDP Education Ltd (ASX: IEL).
Motley Fool contributor James Mickleboro has no position in any of the stocks 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.