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Tickers in this Article: HI, CSV, STON, MATW, SCI, STEI
The past several years have been an exceptionally volatile time in the stock market. As a result, many investors are still left with a tinge of fear, and have understandably looked towards safer investment vehicles for their savings.

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While fixed-income investments such as Treasury bills may seem safer on the surface, they are not completely immune to the effects of inflation. And while no company's common stock can ever be said to be risk-free, some are definitely much safer than others. So instead of throwing the baby out with the bath water and staying out of the stock market entirely, a more prudent strategy is to focus on stocks that offer high degrees of stability, while still harboring opportunity for growth.

Hillenbrand Holds Steady
Clichés are clichés for a reason - they're true. And on that basis, it's time to fall back on one of the oldest clichés: Nothing in this world is certain but death and taxes. With that in mind let's zero in on one company that services the death industry.

Hillenbrand Inc. (NYSE:HI) manufactures and distributes coffins, urns and funeral home display fixtures through its Batesville Casket Company business unit. It also offers specialized funeral services such as funeral home website development and hosting. While there is nothing much upbeat about this line of work, it certainly has a reliable supply of future customers.

After all, everyone eventually needs some sort of post-mortem receptacle, which has to be purchased from Hillenbrand or one of its competitors, such as Carriage Services (NYSE:CSV) or Stonemor Partners (Nasdaq:STON). And as more baby boomers continue to reach their retirement years each year, Hillenbrand's supply of potential customers will surely grow.

Heavenly Financials
The stable nature of its industry has helped Hillenbrand navigate this difficult economic environment without seeing a dramatic decline in its sales volume. In fact, in the last three consecutive quarters, Hillenbrand has managed to produce quarter-over-quarter increases in its top-line sales volume, going from $153.1 million in Q3 2009, to $161.5 million in Q4 2009, to $169.9 million in its most recently reported Q1 2010.

Even more impressive, Hillenbrand achieved those quarterly sales increases without suffering any margin pressure. In fact, its trailing annual gross margin of 43.4% substantially exceeds that of competitors Matthews International (Nasdaq:MATW) at 39.2%, Service Corporation International (NYSE:SCI) at 20.9% and Stewart Enterprises (Nasdaq:STEI) at only 18.2%. This gross margin strength has carried through to the operating level as well, as Hillenbrand's trailing twelve-month operating margin stands well above its peers at an impressive 24.7%. (For more, see The Bottom Line On Margins.)

Dire Valuations
Despite these strengths, the market has recently traded Hillenbrand stock sharply lower, falling from the $25.50 price range in mid-May to currently sit in the $21.50 price range. As a result of this recent decline, the stock is undervalued on a trailing P/E basis against its peers. Hillenbrand's trailing P/E currently sits at 12.5, while Matthews International is priced at 14.3, Stewart Enterprises at 13.2, and Service Corporation International at 16.

In addition to that apparent relative undervaluation, Hillenbrand generates solid free cash flow, which should provide further downside protection on its share price. The company managed to pull in over $130 million in free cash flow in the past twelve months, which for a stock with only 61.7 million shares outstanding works out to over $2.10 of annual free cash flow per share. Given its current $21.50 price range, that works out to a 9.8% free cash flow yield.

Such a relatively high free cash flow yield makes it unlikely the market would trade Hillenbrand shares significantly lower. As well, this downside protection is enhanced by the stability of the company's industry and its annual sales volumes. (For more, see Free Cash Flow: Free, But Not Always Easy.)

The Bottom Line
Despite its consistently strong sales volumes, margin performance and free cash flow generation, the market has traded Hillenbrand stock to valuations significantly below that of its peers. On a free cash flow basis, one has to wonder how much lower this stock could go, given the inherent stability of its industry and the company's sales. Investors who snap up shares of Hillenbrand at these prices are unlikely to expose themselves to significant downside risk, and could very well end up with a handsome return come this time next year. (For more, see The Value Investor's Handbook.)

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