Funerals, auto parts among latest top stock list changes
The addition of this multi-national funeral home operator and removal of two other companies are among the changes to Morningstar's Best Stock Ideas list for June 2018.
The addition of this multi-national funeral home operator and removal of two other companies are among the changes to 
Morningstar'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 Best 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.
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