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Service Corporation Up 12% in a Year: Will Momentum Last?

Zacks Equity Research

Service Corporation International SCI is well positioned for growth, courtesy of its strong efforts and favorable demographic trends. These have been driving this funeral services company even amid hurdles like escalated costs and rising demand for cremations. Markedly, shares of the company have gained almost 12% in the past year against the industry’s decline of 10.2%.

Let’s delve deeper and see if this Zacks Rank #3 (Hold) company can sustain this solid momentum.



Factors Favoring Service Corporation

Service Corporation’s growth efforts are mainly aimed at improving revenues, utilizing scale and deploying capital efficiently. Well, the company focuses on addressing the changing consumer needs and utilizing its robust scale to drive preneed sales. In fact, its second-quarter 2019 comparable cemetery revenues inched up 0.7% year over year, mainly driven by growth in recognized preneed sales.

Further, Service Corporation is making technological advancements to better present its products and services to consumers. These factors along with the demographic landscape are tailwinds for the company’s revenues. Markedly, Service Corporation is likely to continue gaining from the aging Baby Boomer population, which is fueling its preneed cemetery sales programs and likely to drive preneed and at need funeral results. Going ahead, the company plans to allocate about $195 million toward capital enhancements at existing facilities and cemetery development.

This apart, Service Corporation is committed toward pursuing buyouts for both its segments and building new funeral homes to generate greater returns. We note that buyouts are an integral part of the company’s capital investment ventures. The company deployed $14 million during the second quarter toward acquisitions of real estate. It also invested an additional $10 million in building and expansion of funeral homes.

Hurdles Likely to be Offset

Service Corporation has been witnessing a rise in the number of cremations as another option to the traditional funeral service. Well, the company’s average revenues from cremations with service are usually lower compared to that for traditional burials. Hence, the persistence of such a trend is a threat to the company’s overall performance.

Also, Service Corporation has been witnessing escalated interest expenses for a while now. In the second quarter of 2019, interest costs rose $2.8 million to $47.3 million due to higher interest rates on its floating rate debt. This also drove interest costs by $3.8 million in the first quarter to $47.4 million. We believe that persistent high costs may weigh on the company’s bottom line in the near term.

Nonetheless, the aforementioned drivers are likely to help the company tide over these hurdles and keep its impressive show on.

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