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Why Is Service Corp. (SCI) Down 8.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for Service Corp. (SCI - Free Report) . Shares have lost about 8.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Service Corp. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Service Corporation Q4 Earnings Top Estimates, Revenues Up

Service Corporation posted solid fourth-quarter 2020 results. Adjusted earnings of $1.13 per share came way ahead of the Zacks Consensus Estimate of 91 cents. Further, the bottom line more than doubled from the year-ago quarter’s reported figure of 53 cents. The year-over-year growth was attributed to elevated gross profit resulting from increased funeral services and burials performed, together with a robust increase in cemetery recognized preneed revenues. Further, the bottom line gained on reduced shares outstanding, a decline in interest expenses and a lower tax rate compared with the year-ago quarter.

Total revenues of $970.3 million advanced nearly 14% year over year, backed by increased funeral and cemetery revenues. However, the figure came below the consensus mark of $974 million.

Corporate general and administrative costs escalated $6.1 million (or 24.3%) to $31.1 million, mainly owing to greater legal expenses. The company’s interest costs fell $8.2 million to $36.2 million in the quarter. Operating income of $285.4 million increased 18.5% year over year.

Segment Discussion

Consolidated Funeral revenues grew 11.3% to $547.8 million on higher core revenues. Core revenues gained from a rise in atneed and matured preneed revenues. Further, non-funeral home revenues improved year over year, while recognized preneed revenues saw a decline of 10% to $31.4 million.

Comparable funeral revenues advanced 10% year over year, mainly due to major growth in core funeral revenues, which in turn were backed by higher core funeral services performed. However, core funeral services performed were somewhat negated by a fall in core average revenue per service, stemming from social-distancing measures that led to smaller and lesser funeral memorial services. Moreover, the core cremation rate rose 120 basis points. Comparable preneed funeral sales production dropped 1.6% due to declines at core funeral locations, somewhat made up by increases in the non-funeral home 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.

Comparable funeral gross profit jumped 43.6% to $147.3 million. Also, the gross profit margin expanded 640 basis points to 27.5%, courtesy of increased higher-margin core business activities and a better cost structure somewhat due to the smaller and lesser memorial services performed.

Consolidated Cemetery revenues rose 17.7% to $422.4 million, thanks to increased core revenues. Core revenues 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.    

Comparable cemetery gross profit soared 42.4% to $164.5 million and the respective margin expanded 680 bps to 39%. The upside can be attributable to higher cemetery revenues together with an improved cost structure.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $230.9 million, long-term debt of $3,514.1 million and total equity of $1,752.6 million. Net cash provided by operating activities amounted to $804.4 million in 2020. During the same timeframe, the company incurred capital expenditures of $222.2 million. The company undertook several cemetery development and construction projects throughout the year. It expects adjusted net cash from operating activities to be $600-$700 million for 2021. Expenditures associated with capital enhancements at current locations and cemetery development are anticipated in a band of $235-$255 million.

Outlook

Management anticipates witnessing continued pandemic-led impacts in the first half of 2021. The company’s guidance range for the year is also wider than usual owing to the uncertainty surrounding the COVID-19 impact. 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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 5.73% due to these changes.

VGM Scores

At this time, Service Corp. has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Service Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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