I Expect The Insurance-Funded Preneed Model To Yield Stability

Key Takeaways

• Transition to an insurance-funded preneed model aims to stabilize and grow future revenue with enhanced service contracts boosting per-service revenue.
  
• Strong balance sheet and capital investment enable flexibility for share repurchases and investments, driving future earnings per share growth.
  
• Shifts towards insurance-funded models and increasing cremation rates could pressure Service Corporation International's revenue, margins, and growth projections.

Catalysts

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

• SCI is transitioning to an insurance-funded preneed model, which is expected to stabilize and grow preneed sales, impacting future revenue positively once fully implemented by late 2025. This shift is anticipated to drive higher revenue per service due to additional merchandise and travel protection included in contracts.
  
• The company expects funeral segment profit growth and an increase in gross profit margins by 80 to 120 basis points due to higher general agency revenue from a new preneed insurance agreement and managing fixed costs efficiently, impacting net margins positively.
  
• SCI anticipates preneed funeral sales production to normalize and begin growing again towards the end of 2025, projecting a low to mid-single-digit percentage growth rate by 2026, which could increase future revenue streams significantly.
  
• Higher-value contracts maturing from the backlog, which are now including deferred merchandise and travel protections, are expected to continue contributing to healthier average revenue per service growth, enhancing future earnings and revenue.
  
• SCI's robust capital investment program, combined with a strong balance sheet and liquidity, provides flexibility for continued share repurchases and opportunistic investments, which are likely to drive earnings per share growth as seen in their optimistic buyback and M&A outlook.

Service Corporation International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Service Corporation International's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $644.4 million (and earnings per share of $4.4) by about May 2028, up from $530.2 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 22.6x on those 2028 earnings, up from 20.6x today. This future PE is greater than the current PE for the US Consumer Services industry at 19.0x.
• Analysts expect the number of shares outstanding to decline by 2.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Service Corporation International Future Earnings Per Share Growth

Risks

• Preneed funeral sales production is expected to remain slightly lower in 2025 due to the ongoing transition to an insurance-funded model, which could negatively impact immediate revenue.
  
• The cemetery segment experienced a 2% decline in comparable revenue due to lower sales production, which may put pressure on future revenue growth and operating margins in this segment.
  
• Increasing cremation rates, despite bringing lower costs, may lead to reduced average revenue per service, potentially affecting overall revenue from the funeral services segment.
  
• The company's effective tax rate increased due to the nondeductibility of certain tax benefits, which reduced net earnings and could continue to impact net margins negatively.
  
• Large cemetery sales showed volatility and decreased in the last quarter, which could impact projected future revenues if the perceived timing issue persists or worsens.

Valuation

• The analysts have a consensus price target of $88.723 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 $83.34.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.6 billion, earnings will come to $644.4 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $76.82, the analyst price target of $88.72 is 13.4% 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.