Planned Developments And Investments Will Strengthen Long-Term Outlook

Key Takeaways

• Transitioning to an insurance-funded preneed model and new marketing agreements should boost preneed sales and profit margins in future.
  
• Strategic investments and capital returns to shareholders aim to enhance long-term growth, profitability, and stock valuation.
  
• Inflationary pressures, tax law changes, and a transition in preneed sales models could impact revenue, earnings, and profit margins despite growth in average revenue per service.

Catalysts

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

• The transition from a trust-based to an insurance-funded preneed model is expected to stabilize and begin to grow, particularly for the SCI Direct channel, which should positively impact preneed sales growth and revenue starting in the second half of 2025.
  
• New insurance marketing agreements and an increased focus on selling underwritten insurance products are expected to drive higher general agency revenues and improve profit margins in the funeral segment.
  
• Cemetery revenue is anticipated to grow by 2% to 3%, driven by preneed sales, with continued profitability focus enhancing cemetery gross margins, despite inflationary cost pressures.
  
• Planned new and expanded funeral and cemetery developments, alongside strategic digital and other corporate investments, are expected to generate growth capital returns, positively impacting the company’s long-term growth and revenue generation.
  
• Ongoing share repurchase programs and dividend payments are designed to return capital to shareholders, which could contribute to higher earnings per share (EPS) and improved stock valuation over time.

Service Corporation International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Service Corporation International's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $643.0 million (and earnings per share of $4.58) by about March 2028, up from $518.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.8x on those 2028 earnings, up from 22.0x today. This future PE is greater than the current PE for the US Consumer Services industry at 18.5x.
• Analysts expect the number of shares outstanding to decline by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.5%, as per the Simply Wall St company report.

Service Corporation International Future Earnings Per Share Growth

Risks

• The temporary slowdown in preneed sales revenue due to the transition to an insurance-funded preneed model could impact revenue and earnings until the process stabilizes and growth resumes.
  
• The decline in core funeral revenues caused by a decrease in funeral services performed could pressure overall revenue and profit margins, despite growth in average revenue per service.
  
• The higher effective tax rate anticipated for 2025, due to changes in tax laws, could negatively impact net earnings growth, offsetting some operational profit increases.
  
• Fluctuations and potential declines in funeral volumes, influenced by the previous impact of COVID-19 and market dynamics, may suppress growth in revenue from funeral services.
  
• Inflationary pressures, particularly in cemetery maintenance costs, could challenge the ability to maintain or expand profit margins, affecting the overall earnings outlook.

Valuation

• The analysts have a consensus price target of $88.053 for Service Corporation International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $98.0, and the most bearish reporting a price target of just $71.32.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.7 billion, earnings will come to $643.0 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of $79.07, the analyst price target of $88.05 is 10.2% higher.
• 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.