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Service Corporation Gains 11% in a Year: Is it Sustainable?

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Service Corporation International (SCI - Free Report) has seen its shares rally 11.4% over the past year, outpacing the industry’s growth of 9.7%. It is the largest deathcare products and services provider in North America, which has been riding on its strategic growth efforts as well as strong funeral service revenues. Let’s delve deeper and see if these factors can help Service Corporation sustain growth amid soft cemetery preneed sales.

Factors Driving Service Corporation

The company has ben gaining from its strategic growth efforts, which are mainly aimed at increasing revenues, utilizing scale and deploying capital, efficiently. Service Corporation remains focused on catering to the changing consumer needs and utilizing its robust scale to drive preneed sales in both its segments. In fact, Service Corporation is also making technological advancements to better present its products and services to consumers.

These factors along with the demographic landscape remain significant tailwinds to the company’s revenues. Moreover, Service Corporation remains well positioned to continue gaining from the aging Baby Boomer population, which is fueling the company’s preneed cemetery sales program and is expected to boost its preneed and atneed funeral results.

Talking of funeral revenues, the company’s comparable funeral service revenues have been growing year over year for two straight quarters, with an increase in comparable funeral preneed sales production. In the first quarter of 2018, comparable funeral sales rose 2.8% on the back of higher core revenues, which, in turn, was a result of increased funeral services performed. The rise in funeral services performed stemmed from a strong flu season. In fact, strength in core and non-funeral home channels drove comparable preneed funeral sales production by 2.8%.

Also, Service Corporation focuses on pursuing strategic buyouts for both its segments and building new funeral homes to generate greater returns. Buyouts in the cemetery segment are aimed at exploiting increased opportunities to cater to Baby Boomers. Service Corporation has a solid record of making and integrating prudent businesses.  Some notable acquisitions made by the company include Alderwoods Group (2006), Keystone North America (2010), The Neptune Society (2011) and Stewart Enterprises (2013).

Is Cemetery Pre-Need Sales a Worry?

However, the company’s comparable cemetery revenues haven’t witnessed year over year upside for two straight quarters now. In the first quarter of 2018, the metric remained flat, while it declined 2% in the fourth quarter of 2017. Also, in the first quarter, comparable preneed cemetery sales production dipped 3.2% on account of unfavorable timing of large preneed property sales and a tough year-over-year comparison.

Nonetheless, management expects cemetery preneed sales production to increase at a mid-single digit rate in 2018. This along with the aforementioned revenue drivers should help this Zacks Rank #3 (Hold) company sustain growth.

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