Decisive Shifts Poised For Profitable Growth And Enhanced Efficiency

Key Takeaways

• Introduction of insurance partnerships and investments in cemetery projects are set to enhance profitability and fuel future sales growth.
  
• Commitment to digital innovation and efficiency improvements is anticipated to drive cost efficiencies and positively impact net margins.
  
• Challenges in predicting future funeral volumes, increased operational expenses, and fiscal policy impacts pose significant risks to revenue and net margins.

Catalysts

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

• Future stabilization in funeral volumes is anticipated, which should aid in driving revenues back to growth after unexpected declines, impacting revenue positively.
  
• Positive adjustments in SCI Direct operations are expected to reduce the temporary negative impacts on earnings seen in 2024, benefitting both revenue and net margins in the future.
  
• Introduction of new insurance partnership agreements will likely increase general agency commissions, enhancing profitability margins primarily due to higher insurance-funded sales production.
  
• Continuous investment in high-return cemetery development projects aimed to benefit future preneed sales growth, positively impacting core revenue and overall financial health.
  
• Commitment to digital systems, initiatives, and improvements in sales force productivity and efficiency through technology and better lead generation strategies, expected to drive cost efficiencies and potentially improve net margins.

Assumptions

• Analysts are assuming Service Corporation International's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $600.8 million (and earnings per share of $4.23) by about August 2027, up from $509.8 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 21.0x on those 2027 earnings, down from 21.6x today. This future PE is greater than the current PE for the US Consumer Services industry at 20.1x.
• Analysts expect the number of shares outstanding to decline by 4.28% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

Risks

• The decline in funeral profits due to larger-than-anticipated decline in services performed indicates potential risks in predicting future funeral volumes, impacting revenue and net margins.
  
• An increase in annual incentive compensation costs reflects higher operational expenses, potentially affecting net margins.
  
• Lower excess deaths and the impact of the COVID pull-forward effect suggest a normalization that could lead to volatility in service volumes, impacting future revenues.
  
• Higher interest expense and a higher tax rate due to fiscal policy changes could reduce net earnings.
  
• Operational changes in the California market leading to decreased SCI Direct, non-funeral home preneed sales revenue highlight the risks associated with regional operational strategies, potentially impacting revenue.

Valuation

• The analysts have a consensus price target of $83.04 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 $4.5 billion, earnings will come to $600.8 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $76.22, the analyst's price target of $83.04 is 8.2% 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.