Funeral services company Service International (NYSE:SCI) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 1.2% year on year to $1.01 billion. Its non-GAAP profit of $0.81 per share was 4.6% above analysts’ consensus estimates.
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Service International (SCI) Q3 CY2024 Highlights:
- Revenue: $1.01 billion vs analyst estimates of $1.02 billion (in line)
- Adjusted EPS: $0.81 vs analyst estimates of $0.77 (4.6% beat)
- EBITDA: $264.5 million vs analyst estimates of $296.9 million (10.9% miss)
- Management lowered its full-year Adjusted EPS guidance to $3.52 at the midpoint, a 3.6% decrease
- Gross Margin (GAAP): 175%, up from 25.3% in the same quarter last year
- Operating Margin: 20.9%, down from 22.3% in the same quarter last year
- EBITDA Margin: 26.1%, down from 29.8% in the same quarter last year
- Free Cash Flow Margin: 16.1%, up from 13.7% in the same quarter last year
- Funeral Services Performed: 85,743, in line with the same quarter last year
- Market Capitalization: $11.04 billion
Company Overview
Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.
Specialized Consumer Services
Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Technology can be a double-edged sword, though, as it may lower the barriers to entry for new competitors and allow them to do serve customers better.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Service International’s 5.3% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way, a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or emerging trend. Service International’s recent history shows its demand slowed as its revenue was flat over the last two years. 
Service International also discloses its number of funeral services performed, which reached 85,743 in the latest quarter. Over the last two years, Service International’s funeral services performed averaged 2.5% year-on-year declines. Because this number is lower than its revenue growth during the same period, we can see the company’s monetization has risen. 
This quarter, Service International grew its revenue by 1.2% year on year, and its $1.01 billion of revenue was in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, an improvement versus the last two years. Although this projection indicates the market thinks its newer products and services will catalyze better performance, it is still below average for the sector.
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Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.
Service International has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 11.7% over the last two years, slightly better than the broader consumer discretionary sector.
Service International’s free cash flow clocked in at $162.8 million in Q3, equivalent to a 16.1% margin. This result was good as its margin was 2.4 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.
Key Takeaways from Service International’s Q3 Results
It was encouraging to see Service International slightly top analysts’ EPS expectations this quarter. On the other hand, its EBITDA missed and it lowered its full-year EPS guidance. Overall, this was a softer quarter, but the stock traded up 5.1% to $80 immediately after reporting.
So should you invest in Service International right now? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.