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Service International's (NYSE:SCI) Q4: Beats On Revenue


Full Report / February 12, 2024

Funeral services company Service International (NYSE:SCI) reported Q4 FY2023 results topping analysts' expectations, with revenue up 2.7% year on year to $1.06 billion. Its non-GAAP profit of $0.93 per share was flat year on year.

Service International (SCI) Q4 FY2023 Highlights:

  • Revenue: $1.06 billion vs analyst estimates of $1.02 billion (3.2% beat)
  • EPS (non-GAAP): $0.93 vs analyst estimates of $0.91 (2% beat)
  • Free Cash Flow of $183.5 million, up 33.9% from the previous quarter
  • Gross Margin (GAAP): 27.2%, in line with the same quarter last year
  • Funeral Services Performed: 90,459
  • Market Capitalization: $9.93 billion

Founded in 1962, Service International (NYSE: SCI) is a leading provider of death care products and services in North America.

Service International’s primary business involves owning and operating funeral homes and cemeteries, offering a range of services that cater to the diverse needs of families during difficult times. The company's extensive network includes over 1,500 funeral homes and around 400 cemeteries. These facilities provide traditional funeral, cremation, and cemetery services while selling funeral and cemetery products like caskets, urns, and burial vaults.

Service International allows its customers to customize their funeral and memorial services. This approach extends to pre-planning services, where individuals can arrange their funeral and cemetery needs in advance, providing peace of mind for themselves and their families.

Service International’s Dignity Memorial brand is one of the largest networks of funeral, cremation, and cemetery service providers in North America. Under this brand, it offers the Dignity Planning process, which includes online tools and resources to help families plan and personalize services.

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.

Service International's primary competitors include Carriage Services (NYSE:CSV), Park Lawn (TSX:PLC), and Matthews International (NASDAQ:MATW).

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. Service International's annualized revenue growth rate of 5.1% over the last five years was weak for a consumer discretionary business. Service International Total RevenueWithin consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Service International's recent history shines a dimmer light on the company, as its revenue was flat over the last two years.

We can understand the company's revenue dynamics even better by analyzing its number of Funeral Services Performed, which reached 90,459 in the latest quarter. Over the last two years, Service International's Funeral Services Performed averaged 3% year-on-year declines. Because this number is lower than its revenue growth during the same period, we can see the company's average selling price has risen. Service International Funeral Services Performed

This quarter, Service International reported reasonable year-on-year revenue growth of 2.7%, and its $1.06 billion of revenue topped Wall Street's estimates by 3.2%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Service International has been a well-oiled machine over the last two years. It's demonstrated elite profitability for a consumer discretionary business, boasting an average operating margin of 22.7%. Service International Operating Margin (GAAP)

In Q4, Service International generated an operating profit margin of 22.9%, up 6.7 percentage points year on year. This increase indicates the company was more efficient with its expenses over the last quarter, spending less money in areas like corporate overhead and advertising.

Over the next 12 months, Wall Street expects Service International to maintain its LTM operating margin of 23%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Service International EPS (Adjusted)

Over the last five years, Service International's EPS grew 93.8%, translating into a solid 14.1% compounded annual growth rate. This performance is materially higher than its 5.1% annualized revenue growth over the same period. Let's dig into why.

Service International's operating margin has expanded 1.9 percentage points over the last five years while its share count has shrunk 19.9%. Improving profitability and share buybacks are positive signs as they juice EPS growth relative to revenue growth.

In Q4, Service International reported EPS at $0.93, in line with the same quarter a year ago. This print beat analysts' estimates by 2%. Over the next 12 months, Wall Street expects Service International to grow its earnings. Analysts are projecting its LTM EPS of $3.47 to climb by 5.4% to $3.66.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Service International has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 11.5%, slightly better than the broader consumer discretionary sector.

Service International Free Cash Flow Margin

Service International's free cash flow came in at $183.5 million in Q4, equivalent to a 17.4% margin and up 244% year on year.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Service International's five-year average return on invested capital was 13.8%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Service International's ROIC has stayed the same over the last two years. If the company wants to become an investable business, it will need to increase its returns.

Key Takeaways from Service International's Q4 Results

It was good to see Service International beat analysts' revenue and EPS estimates this quarter, driven by better-than-expected performance in its cemetery segment. Its Funeral Services Performed also topped Wall Street's projections. Overall, the results were fine. The stock is flat after reporting and currently trades at $68.25 per share.

Is Now The Time?

Investors should also consider Service International's valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Service International, we'll be cheering from the sidelines. Its revenue growth has been uninspiring over the last five years, and analysts expect growth to deteriorate from here. And while its impressive operating margins show it has a highly efficient business model, the downside is its number of Funeral Services Performed has been subpar. On top of that, its projected EPS for the next year is lacking.

Service International's price-to-earnings ratio based on the next 12 months is 18.6x. While we've no doubt one can find things to like about Service International, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $73.33 per share right before these results (compared to the current share price of $68.25).

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