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Is it game over or game on for this fallen FTSE 250 stock?

The share price of one-time market darling Dignity (LSE: DTY) has fallen more than 75% over the last two years. As a result, the UK’s only listed provider of funeral-related services has crashed out of the FTSE 250.

The shares are down again today after the Competition and Markets Authority (CMA) announced this morning that it’s launched “an in-depth market investigation into the funerals sector.” Is this another nail in the coffin for Dignity, or is the stock one of the biggest turnaround prospects on offer today?

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Indignity

The CMA’s concerns include:

  • The rise in cost of organising a funeral, the essential elements of which have increased by 6% each year — twice the inflation rate — for the last 14 years.
  • Lack of clear pricing and comprehensive information on quality and range, exploiting the vulnerability of many people when organising a funeral.
  • Low numbers of crematoria providers in local areas, and difficulty for new companies to enter the market due to the planning regime and high fixed costs.
  • High prices in relation to crematoria services — the largest private operators have implemented average price rises of between 6-8% each year for the past eight years.

The CMA has the power to make legally-binding orders requiring changes to be made, if it deems action is necessary.

Dignity’s response

A full investigation of the market by the CMA was always on the cards, which is why I think Dignity’s shares have shed only a relatively modest 3% on today’s announcement.

The company released a statement in response: “Dignity has engaged constructively with the CMA since the market study was announced in June 2018 and has made public its support for such an investigation, believing it could help improve standards across the sector and deliver better outcomes for customers.” Chief executive Mike McCollum added: [We] look forward to continuing our work with the CMA and other industry bodies.”

Good value on offer

The ability to raise funeral prices ahead of inflation, and the barriers to new entrants to the crematoria market, were strong elements of the original investment case for Dignity. However, it became clear a couple of years ago, amid rising competition and cost-consciousness, that Dignity’s pricing strategy was unsustainable. The big reason why the share price is where it is now is that the company signalled a major reset of the business in January 2018.

Since then, it has introduced a transformation plan — in full awareness of the CMA’s concerns and in full expectation of today’s announcement. In its annual results earlier this month, the company confirmed a lower base for profit in 2019, and said: “In the medium-term the board believes that targeting solid single digit increases in underlying earnings is appropriate and achievable.”

At a current share price of 670p, the stock is on offer at just 9.8 times forecast 2019 earnings, with a running dividend yield of 3.6%. As the funerals industry remains an attractively defensive business, and as I don’t believe the CMA investigation will derail Dignity’s transformation plan, I see good value on offer for investors today. I rate the stock a ‘buy’.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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