Calculated Acquisitions And Demographic Trends Propel Growth Amidst Challenges

Key Takeaways

• Recent acquisitions and cemetery development investments are expected to boost revenue growth and enhance earnings through synergies and enhanced preneed sales.
  
• The strategy to leverage demographic trends and a substantial preneed backlog supports long-term revenue growth and operational stability.
  
• Operational challenges, cost pressures, and dependency on large cemetery sales threaten revenue consistency and profitability, with strategic risks in insurance-funded contract transitions and expense increases.

Catalysts

Provides deathcare products and services in the United States and Canada.

• SCI's recent acquisitions of top-tier businesses in major metropolitan markets are expected to enhance revenue growth and contribute positively to earnings as they integrate and leverage synergies.
  
• The transition to a new preneed insurance provider, despite causing short-term disruptions, is anticipated to stabilize and improve preneed funeral sales production, supporting revenue and future earnings.
  
• The completion of premium cemetery sections, such as those at Rose Hills, is expected to enhance large preneed sales and drive revenue growth in 2025 and beyond.
  
• SCI's increased investment in cemetery development projects and existing facilities is aimed at supporting future preneed sales, which will positively impact revenue and operating margins.
  
• The company's strategy to capitalize on demographic trends with its extensive North American network and $16 billion preneed backlog is expected to drive long-term revenue and earnings growth.

Service Corporation International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Service Corporation International's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $635.5 million (and earnings per share of $4.57) by about November 2027, up from $505.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2027 earnings, down from 24.6x today. This future PE is greater than the current PE for the US Consumer Services industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.89%, as per the Simply Wall St company report.

Service Corporation International Future Earnings Per Share Growth

Risks

• The transition from trust to insurance-funded contracts in SCI Direct has resulted in a decrease in nonfuneral home preneed sales revenue, which is impacting overall revenue streams. The requirement for sales counselors to obtain insurance licenses has further slowed sales growth.
  
• Inflationary pressures have caused operational costs to outpace revenue growth. This mismatch has led to a slight decline in funeral gross profit and margin percentages, potentially constraining net margins.
  
• The volatility in interest rates has increased interest expense, which is affecting net earnings by offsetting gains from lower share counts and tax rates.
  
• Increases in corporate general and administrative expenses, driven by incentives tied to shareholder return, have impacted net earnings growth, posing a risk to overall profitability.
  
• Over-reliance on large cemetery sales, particularly at premium locations like Rose Hills, has introduced volatility and dependency risks into core cemetery revenue streams, which could lead to inconsistent revenue performance.

Valuation

• The analysts have a consensus price target of $88.47 for Service Corporation International based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.6 billion, earnings will come to $635.5 million, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 6.9%.
• Given the current share price of $85.94, the analyst's price target of $88.47 is 2.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.