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The InvoCare share price dropped 5% in August. Is it a buy?

The InvoCare Limited (ASX: IVC) share price dropped more than 5% in August and seems to be coming off the boil after running up over 60% between January and July. InvoCare shares opened at $14.69 this morning and have since risen 2.76% to $14.89 at the time of writing, but are still a ways from the 52-week high of $16.77. So does this mean InvoCare is a buy today? Let’s take a look.

What does InvoCare do?

InvoCare is the king of the funeral industry in Australia (a rather unappealing title if you ask me). Still, with 290 funeral parlours and 16 cemeteries and crematoria across Australia, New Zealand and Singapore, this company is in the heart of an (unfortunately) evergreen market.

InvoCare offers funeral and death services through its well-known brands like White Lady Funerals and Simplicity Funerals, priding itself on constantly adapting to consumer preferences and trends. In this way, the company has managed to net a large chunk of market share in what is otherwise a very fractured and decentralised industry.  

Is InvoCare a buy at these prices?

Well, InvoCare shares are certainly cheaper than they were a month ago, but (in my opinion), they are not a screaming bargain either. InvoCare is currently trading on a price-to-earnings ratio of 27, which is significantly above the current market average of 17. In its recently reported FY19 earnings, the company did post some nice numbers, including underlying revenue growth of 9.8% and earnings growth of 13.3%. Earnings from the Singapore market were a standout, up 119% to $.4.6 million in what is (clearly) a growth market for the company.  

Although this growth is a positive, it still (for me) doesn’t justify a growth company valuation of 27x earnings. There has been a trend in demand for defensive shares during this year, and it doesn’t come more defensive than the funeral industry, so this might explain the extraordinary growth in InvoCare shares in 2019 so far. But InvoCare did not increase its dividend for FY19 and offers a 2.5% yield on current prices, so its defensive appeal has limits.

Foolish takeaway

Although I do like InvoCare as a company and think that it is a defensive industry worth having exposure to, I personally would be looking for a much cheaper entry point (and higher starting yield) if I was to consider opening a position.

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Motley Fool contributor Sebastian Bowen 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.

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