Service Corporation (SCI) Gains on High Pandemic-Led Funerals
Service Corporation International SCI appears to be in a good shape. The company has been gaining on increased funerals performed due to the coronavirus pandemic. That being said, soft preneed sales in the Funeral segment due to the impact of social distancing have been a concern. Moreover, the company is witnessing high COVID-19 costs, though its focus on improving the cost structure is noteworthy.
The impact of these factors was visible in the company’s third-quarter 2020 performance, wherein both earnings and revenues improved year over year and surpassed the Zacks Consensus Estimate on the back of higher core revenues in both Funeral and Cemetery segments. Let’s delve deeper.
Factors Working Well for Service Corporation
With curbs being lifted, Service Corporation has seen unexpected increases in its preneed cemetery sales production. On its third-quarter earnings call, management said that it continued to witness such trends in October, though at a slower rate than the third quarter. Apart from this, the company saw considerable growth in the number of families opting for memorial services during the third quarter. In the Cemetery segment, revenues rose 29.3% to $399.6 million in the third quarter, thanks to increased core revenues. Core revenues gained from an increase in both atneed and total recognized preneed revenues. Comparable Cemetery revenues improved on the back of higher core revenues, which in turn were fueled by elevated atneed revenues stemming from a rise in burials performed.
Comparable preneed cemetery sales production surged 46.9% owing to growth in sales velocity and sales averages, and higher sales. Sales velocity was driven by the continued expansion of virtual tools, increased customer sales incentives and greater leads from atneed services. Further, the company saw higher conversion and close rates, thanks to customers’ greater awareness about the possible effects of coronavirus, along with a rise in location traffic as a result of greater funeral services performed. Solid revenues, together with an improved cost structure, also fueled segment gross profit and margin.
All said, management expects a high-single-digit increase in funeral volumes as well as atneed cemetery revenues in the fourth quarter of 2020. For 2020, Service Corporation envisions adjusted earnings per share of $2.50-$2.75 compared with $1.90 reported in 2019.
Apart from this, Service Corporation has been benefiting from its focus on expansion. During the first nine months of 2020, the company incurred capital expenditures of $155.6 million. In the third quarter, capital expenditures amounted to $225 million, which was partially directed toward maintenance and cemetery development. Also, the company made investments to achieve growth via buyouts and through the construction of new opportunities. These investments are touted to be accretive to the company in the near term.
Will Hurdles be Countered?
Although Service Corporation’s revenues grew in the third quarter of 2020 due to increased deaths amid the pandemic, its preneed sales remained soft in the Funeral segment. In the Funeral segment, comparable preneed funeral sales production dropped 2.8% due to declines at core funeral locations and a fall in preneed production in the non-funeral home channel. This was accountable to the continued effect of social distancing on two of the company’s key lead sources — at-home follow-up visits and in-person seminars. Apart from this, results in the segment were partly hampered by a fall in core average revenue per service, stemming from social-distancing measures that led to smaller and lesser funeral memorial services.
Further, Service Corporation is witnessing elevated costs, especially amid the COVID-19 pandemic. During the third quarter of 2020, corporate general and administrative costs escalated $11.3 million to around $41 million due to greater healthcare self-insurance reserves and costs related to community outreach efforts. Persistence of such trends may hurt the company’s performance.
Nevertheless, we believe that the abovementioned factors, together with an aging baby boomer population, are likely to generate higher revenues for this provider of deathcare services. Shares of this Zacks Rank #3 (Hold) company have gained 8.8% in the past three months, almost in line with the industry’s performance.
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Matthews International Corporation MATW has a Zacks Rank #2 (Buy) and a trailing four-quarter earnings surprise of 31.4%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Hillenbrand HI, which currently carries a Zacks Rank #2, has a trailing four-quarter earnings surprise of 45.9%, on average.
B&G Foods BGS has a Zacks Rank of 2 and a trailing four-quarter earnings surprise of 9.3%, on average.
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