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Service Corporation International Message Board

  • trentman_wi trentman_wi Oct 2, 2006 5:48 PM Flag


    Disclosure: I have shorted these shares, but wanted to start a discussion about SCI's fundamentals to make sure I should stay short, or if I was missing something.

    We all know, the past 5 years have been rough for this company and they are emerging from those years and expect to return to brighter days. Right now share price is $9.10.

    Stoichastic analysis:

    Book Value Per Share (mrq): 5.502 (not bad)
    Total Cash Per Share (mrq): 1.809 (good, should help debt financing)
    Revenue Per Share (ttm): 5.794 (I suggest this is bad relative to other former "accumulator" companies like WMI where the revenue/share is higher in relation to stock price)
    Diluted EPS (ttm): 0.223 (low)
    Trailing P/E (ttm, intraday): 40.94
    Forward P/E (fye 31-Dec-07) 1: 24.03 (these would be decent for a company growing 25% for next 5 years, and then 15% infinitely, but I don't believe that is the case at SCI)
    PEG Ratio (5 yr expected): 3.13 (Very Bad)
    Profit Margin (ttm): 3.90% (Horrible, but should improve some)
    Return on Equity (ttm): 4.22% (horrible, but should improve some)
    Cash Flow from Operations Per Share (06/06): 71,389/292,000 = $.24 (To judge earnings quality, earnings appear fair)
    % Held by Institutions4: 80.40% (Wow, there are a lot of institutions here, more than I thought, gives stability to stock supposedly)

    Soft Side Analysis (IMHO):

    Funeral Home Negativity in Press (Very Bad, due to a few "bad apples" but effect on sales for SCI is negative as individual homes maintain their own image more than SCI brand impacts market)
    SCI same store sales (Fair to bad) I don't have the great numbers here, however in years past this was a major concern that once SCI bought a funeral home, year over year comparables were dropping due to sales efforts and SCI policies. If anyone has statistics in this area please publish.
    Ratio of Cremations to Deaths: (Sort of Bad) This is widely known that the rate of cremations is a growing trend which leads to lower profitability per customer.
    Emergence of cut rate funeral services: (Mild) I think it is known that companies like Costco have begun offering cut rate caskets and service plans which in the future hurt more than present.
    Return to Solvency: (Great!) That they are able to remove the choke-hold of the past year's debt financing has definitely been very good for the stock.

    Anything I missed? Please contribute. I feel that I have not given enough to the positives, and focused too much on my perceived negatives. However, that has led me to believe the stock is too richly valued.

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    • You're on the right track. Word is that the takeover is Monday, upon which share price will rise, thanks to the dumbasses out there. But in the short term, the stock will continue its decline because the era of big funeral corps is long since over.

    • SCI has based between 6.50-8.50 for 2 years. I like that foundatioin or consolidation pattern. With the pending merger things look technically sound for the next leg up.

    • #1 with AWGI, add pricing power, synergies, etc.

      Market pays more for the leaders in their respective space.

      At some point boomers will begin dying at accellarated rate because of the sheer numbers.

      Good cash flow, may increase dividend

      Merger places them in better position to meet the changes and demands of the industry and consumer.

      Shuffling debt to reduce costs.

      How low can it go???

      • 1 Reply to aeroval
      • Thank you. I agree, the merger can be additive for the reasons you specify, IF SCI can leverage it's influence.

        I also agree the market leader deserves a premium usually, but SCI hasn't demonstrated it can take advantage of that. It has been the market leader in the US for quite some time and that bought a near bankruptcy.

        The boomers have been (over)-priced into this stock for at least the last 10 years IMHO.

        How low can it go? I am guessing aroun $7.5 $8 is a fair value until they can start really exercising their merger power.

    • You wrote--
      "Ratio of Cremations to Deaths: (Sort of Bad) This is widely known that the rate of cremations is a growing trend which leads to lower profitability per customer."

      No, it's not lower profitability. It's lower total revenue per call. Actually, profitability is probably considerably higher with cremation calls as it is less labor-intensive, with labor a major overhead cost. But I don't think SCI (or many FDs) have figured out how to deal with that yet. SCI gave up it's contract with the Seattle consumer group (100,000+ members) and it's British Columbia group (200,000? members). And these would have been no-nonsense, not-a-lot-of-trouble calls because most all the families plan ahead with their next-of-kin. The independent discounters are thrilled and loving it.

      And SCI needs to play straight with the public--Do they show the General Price List of the local funeral home with a $1,900 direct cremation charge or do they whip out another one (at the same address) for the "National Cremation Society" at $1,000 less but only if they're about to lose the body? Consumers catch on to this kind of crap pretty fast and may prefer to give their business to someone who is right up-front about their prices, prices that won't change on a salesman's whim.

      The other inherent problem in the industry is the glut of facilities in many areas, far too many for the death rate. SCI has been selling off some. Probably needs to sell off a whole lot more and hope they turn into restaurants or lawyers' offices. Real estate is worth more than the funeral business in many locations. The merger with Alderwoods should dictate a flood of selling where there are too many multiple locations . . . IF SCI is on the ball. But that remains to be seen. There are too many dunderheads in Houston, so I'm not holding . . . my breath or any stock.


      • 1 Reply to funeral_gadfly
      • Good points. I hadn't heard about any over-capacity concerns, thank you.

        I think my comments about profitability with regards to cremations is that for every death that arrives at an SCI funeral home if the markup over costs for a burial and cremation are nearly equal (say for argument 25%) then at an average cost of $6,000 (burial) vs. $1,500 (cremation) the profits received per customer will be lower, thus lower overall profitability to SCI on whole. I believe we were both meaning the same thing. I hadn't heard that the margins on a cremation overall were higher though, thank you for that.

    • Negative press doesn't impact very far from its origin because few people not connected with funeral service realize that their local funeral home is an SCI facility, if it is.

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