Service Corporation (SCI) Up 30% in 6 Months: Will Growth Stay?
Service Corporation International SCI has been benefiting from increased Cemetery segment revenues. A focus on making capital investments to strengthen its network has also been adding to the company’s strength. However, Funeral unit sales have been soft. The fading impact of increased deaths (including the pandemic), along with high interest rates, is likely to hurt bottom-line growth in 2024.
In 2024, Service Corporation expects EPS, excluding special items, in the range of $3.50-$3.80 compared with $3.47 reported in 2023. That said, management anticipates a restoration to its typical earnings per share growth range of 8%-12% in 2025.
Shares of this Zacks Rank #3 (Hold) company have rallied 29.5% in the past six months, outpacing the industry’s growth of 20.1%.
What’s Working Well?
Service Corporation remains focused on making capital investments to strengthen its network. The company is investing in its current funeral locations, renovating and updating its venues to establish a more contemporary setup. Management is also elevating its cemetery inventory options with casketed as well as cremation consumers to house a diverse customer base.
During 2023, the company incurred capital expenditures of $631.8 million, which included increased cemetery development expenditures and digital investments, among others. On its fourth-quarter earnings call, management stated that its acquisition pipeline is solid. SCI continues to increase market share opportunities through the construction of new funeral home facilities and the creation of new cemeteries in its existing high-growth areas.
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Management expects total maintenance capital expenditures of $325 million for 2024, which includes investments in funeral and cemetery facilities, cemetery development projects, digital strategies and other corporate investments. Other than this, management intends to spend $75-$125 million on acquisitions during 2024.
Service Corporation has been seeing a rise in the Cemetery segment’s revenues for a while now. In the fourth quarter of 2023, consolidated Cemetery revenues came in at $482.6 million, up from $447.5 million reported in the year-ago quarter. Comparable cemetery revenues increased 7.7%. The upside was mainly caused by increased core revenues to the tune of $31.5.
Meanwhile, Core revenues increased due to growth in total recognized preneed revenues, partially hurt by reduced atneed revenues. Comparable preneed cemetery sales production rose 9.4% due to continued strength in large sales activity, along with a higher core production sales average.
These factors keep SCI well-placed for growth amid near-term worries.
Current Challenges
In the fourth quarter, consolidated Funeral revenues came in at $573.2 million for Service Corporation, down from $580.2 million reported in the year-ago period. This could be attributed to lower core revenues stemming from a decline in atneed revenues. Total comparable funeral revenues fell 2.2%, mainly due to a fall in core funeral revenues. Core funeral revenues decreased 2.1% due to a decline in core funeral services performed (resulting from lower pandemic-related activity). This was somewhat countered by growth in the core average revenue per service.
The diminishing impact of increased deaths (including the pandemic) affects the number of funerals as well as at-need cemetery revenues, thereby marginally lowering the anticipated growth in preneed cemetery sales production. Additionally, prevailing higher interest rates compared to the previous year, especially in the early months, are likely to dent Service Corporation’s growth forecasts for its annual earnings per share growth in 2024.
Solid Consumer Staple Bets
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