Strategic Shifts And Investments Propel Positive Growth And Margin Expansion In The Funeral Industry

Key Takeaways

• Strategic acquisitions and capital investments position SCI for revenue growth and margin expansion through optimized operations and enhanced cemetery sales.
  
• Preneed insurance agreements and shifts in funding strategies aim to boost agency revenues and earnings growth, improving future margins.
  
• Inflation and increased expenses may hinder revenue growth and profitability, while uncertain volume growth in funeral services could impact future earnings.

Catalysts

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

• SCI's recent investments in high-quality acquisitions in major metropolitan areas, including adding 10 funeral homes and 2 cemeteries, suggest potential for increased revenue and profit growth as these assets are integrated and optimized within the company's existing operations.
  
• The new preneed insurance marketing agreement is expected to drive higher general agency revenues, positively impacting net margins due to increased commissions and improved product offerings.
  
• Despite recent declines, SCI anticipates a stabilization and return to growth in preneed sales, which could positively affect future revenue streams once the current transitions are complete and operational changes are fully implemented.
  
• With significant capital investments in cemetery inventory development and the expansion of existing facilities, SCI is well-positioned to capture future cemetery sales growth, which could enhance both revenue and operating margins.
  
• The anticipated stabilization of funeral volumes, combined with a strategic shift from trust to insurance-funded contracts, sets the stage for improved earnings growth and potential margin expansion in future periods.

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 23.9x today. This future PE is greater than the current PE for the US Consumer Services industry at 17.8x.
• 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 dollars, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Service Corporation International Future Earnings Per Share Growth

Risks

• The decline in preneed funeral sales production by 7% in the third quarter, mainly due to the transition to a new preneed insurance provider, poses a risk to future revenue growth.
  
• Inflationary increases in fixed costs have outpaced revenue growth, which could lead to a decrease in net margins if the trend continues.
  
• Higher interest expenses and corporate general and administrative expenses may outweigh revenue gains and impact net earnings.
  
• A potential rise in cash taxes in 2025 by about $150 million compared to 2024 may negatively impact cash flow and profitability.
  
• Uncertain volume growth expectations in funeral services, despite modeling stabilization, could impact future earnings if volumes do not recover as anticipated.

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 6.8%.
  
• Given the current share price of $83.72, the analyst's price target of $88.47 is 5.4% 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.