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Service Corporation (SCI) Gains on Higher Services Amid Pandemic

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Service Corporation International (SCI - Free Report) has been benefiting from higher funeral services performed as well as increased burials in the company’s cemeteries amid the pandemic. This along with a solid cost structure aided the company’s fourth-quarter 2020 results, wherein both earnings and revenues improved year over year and the bottom line surpassed the Zacks Consensus Estimate. Incidentally, both Funeral and Cemetery segments benefited from higher core revenues.

Apart from these, the company’s focus on expansion via buyouts and building new funeral homes is noteworthy. However, the company’s preneed sales as well as core average revenue per service have been soft in the Funeral segment due to increased social-distancing trends. Additionally, the company has been witnessing high corporate general and administrative costs for a while. Apart from these, management’s guidance for 2021 indicates tough year-over-year comparisons. Let’s delve deeper.

What’s Aiding Service Corporation?

The company’s Cemetery segment revenues have been solid for a while. During the fourth quarter, segment revenues rose 17.7% to $422.4 million, thanks to higher core revenues that gained from an increase in both atneed and total recognized preneed revenues. Comparable Cemetery revenues improved 17.8% year over year on the back of higher core revenues. This, in turn, was fueled by elevated atneed revenues, which stemmed from a rise in burials performed. Moreover, recognized preneed revenues grew, courtesy of solid comparable preneed cemetery property sales production.

Comparable preneed cemetery sales production rose 16% owing to growth in large sales activity as well as greater contracts sold. Sales velocity continued to be driven by the expansion of virtual tools, increased customer sales incentives, and greater leads from atneed services and company-generated leads. Further, the company continued to witness elevated conversion and close rates, thanks to customers’ greater awareness of the possible effects of coronavirus, along with a rise in location traffic as a result of greater funeral services and burials performed. Solid revenues, together with an improved cost structure, also fueled segment gross profit and margin. Cemetery atneed revenues are expected to witness considerable year-over-year growth in the first quarter of 2021, though it is likely to see declines in the last three quarters due to tough comparisons with the year-ago period.

Additionally, the company remains committed to pursuing strategic buyouts for both its segments and building new funeral homes to generate greater returns. In 2020, the company incurred capital expenditures of $222.2 million. It undertook several cemetery development and construction projects throughout the year. Expenditures associated with capital enhancements at current locations and cemetery development are anticipated in a band of $235-$255 million for 2021.

Factors Hindering Growth

In the Funeral segment, comparable preneed funeral sales production dropped 1.6% in the fourth quarter due to declines at core funeral locations. This was accountable to the continued effects of social distancing on two of the company’s key lead sources — at-home follow-up visits and in-person seminars. Apart from these, results in the Funeral 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. We note that a resurgence in coronavirus cases during November and December 2020 resulted in the re-imposition of a number of limitations on gatherings. Total recognized preneed revenues in the segment declined 10% to $31.4 million.

We note that management anticipates witnessing continued pandemic-led impacts in the first half of 2021. For 2021, Service Corporation envisions adjusted earnings per share of $2.50-$2.90. The company’s earnings came in at $2.91 per share in 2020. Service Corporation expects volumes in the Funeral segment to decline in 2021 from 2020 levels. While it expects double-digit year-on-year increases through March, comparable volumes are likely to be lower through the rest of 2021 due to comparisons with a very active last nine months of 2020.

Although funeral average may increase year over year in 2021, it is likely to be lower than 2019 levels due to continued social-distancing practices. Also, in full-year 2021, management expects comparable cemetery revenues to decline from 2020, while it is likely to depict considerable growth from pre-pandemic levels.

Shares of this Zacks Rank #3 (Hold) company have gained 22.8% in the past six months compared with the industry’s growth of 40.8%.

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