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Service Corp. (SCI) Down 5.8% Since Last Earnings Report: Can It Rebound?

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  • SCI

It has been about a month since the last earnings report for Service Corp. (SCI). Shares have lost about 5.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Service Corp. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Service Corporation Q1 Earnings Top Estimates, Revenues Up

Service Corporation posted solid first-quarter 2021 results, with the top and the bottom line increasing year over year and beating the Zacks Consensus Estimate. Moreover, management raised its bottom-line view for 2021. The company posted adjusted earnings of $1.32 per share, which surpassed the Zacks Consensus Estimate of 98 cents. Further, the bottom line reflected a sharp rise from earnings of 43 cents reported in the year-ago quarter. Year-over-year growth can be attributed to elevated gross profit resulting from increased funeral services and burials performed along with a robust increase in cemetery recognized preneed revenues. Further, the bottom line gained on reduced shares outstanding and a decline in interest expenses.

Total revenues of $1,078 million advanced nearly 34.2% (or $275 million) year over year, backed by increased funeral and cemetery revenues. Moreover, the figure came ahead of the Zacks Consensus Estimate of $953.6 million. Gross profit amounted to $377.5 million, up $198.5 million year-on-year. Corporate general and administrative costs escalated $4.9 million (or 15.4%) to $36.7 million. Operating income of $342 million increased $190.2 million year over year.

Segment Discussion

Consolidated Funeral revenues rallied 22.7% to $ 619.4 million. Atneed revenues increased 27.7% to $338.1 million, while matured preneed revenues increased 16.3% to $190.2 million. Moreover, core revenues increased 23.3% to $528.3 million. The segment also gained from growth in non-funeral home revenue and recognized preneed revenue. Comparable funeral revenues advanced 21.7% year over year, mainly owing to growth in core funeral revenues, which in turn, were backed by higher core funeral services performed and core average revenue per service. The core cremation rate moved up 20 basis points to 52%. Comparable preneed funeral sales production increased 16.4% driven by higher digital and direct mail leads, rise in location traffic due to higher services performed as well as the gradual return of in-person seminars. Further, the company witnessed 9.2% growth in core funeral locations and a 43.4% rise in preneed production through non-funeral home channel.

Consolidated Cemetery revenues rose 53.8% to $458.5 million, thanks to increased core revenues. Core revenues gained from an increase in both atneed and total recognized preneed revenues. Comparable Cemetery revenues improved 53.9% year over year on the back of higher core revenues. This, in turn, was fueled by elevated recognized preneed revenues owing to solid comparable preneed cemetery property sales production. Moreover, growth in atneed revenues, which stemmed from a rise in burials performed, was an upside. Comparable preneed cemetery sales production rose 67.1% owing to growth in large sales, sales averages as well as sales velocity. The company continued to gain from an efficient sales force, prudent utilization of customer relationship management system as well as improved conversion rates from direct mail and digital lead campaigns. Further, the company continued to witness elevated conversion and close rates, thanks to customers’ greater awareness of the possible effects of coronavirus. It also saw an increase in location traffic as a result of greater funeral services and burials performed.

Other Financial Details & Guidance

Service Corporation, ended the quarter with cash and cash equivalents of $243.7 million, long-term debt of $3,439.1 million and total equity of $1,850.7 million. Net cash provided by operating activities amounted to $297.6 million in the first three months of 2021. During the same timeframe, the company incurred capital expenditures of $42.3 million. The company undertook several cemetery development and construction projects. It expects adjusted net cash from operating activities to be $650-$725 million for 2021. Expenditures associated with capital enhancements at current locations and cemetery development are anticipated in a band of $235-$255 million.

Based on the sturdy performance witnessed during the first quarter, management raised its bottom line projection for 2021. It now envisions adjusted earnings per share in the range of $2.70-$3.00 compared with $2.50-$2.90 projected earlier. The company’s guidance for the year is wider than usual owing to the uncertainty surrounding the COVID-19 impact. We note that the company’s earnings came in at $2.91 per share in 2020. 

Additionally, management informed that the company is on track with its long-term earnings growth framework. Accordingly it will maintain focus on its core strategies that include growing revenues by remaining relevant to client families, leveraging scale and maximizing capital deployment opportunities.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, Service Corp. has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision indicates a downward shift. It comes with little surprise Service Corp. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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