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Why Is Service Corp. (SCI) Up 8.6% 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 added about 8.6% in that time frame, outperforming the S&P 500.

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

Service Corporation Beats on Q2 Earnings & Revenues

Service Corporation posted second-quarter 2018 results, wherein adjusted earnings increased 25.7% year over year to 44 cents per share and came a penny ahead of the Zacks Consensus Estimate.  The year-over-year upside was backed by improved sales, greater operating income, impacts from the new revenue recognition accounting standard, lower tax rate and impacts from share buybacks.

Thanks to the tax reforms, adjusted effective tax rate was 26.7% in the second quarter of 2018, compared with 33.6% in the same period last year.

Total revenues came in at $796.1 million, up almost 3% from $773.2 million recorded in the year-ago period. Moreover, the figure surpassed the consensus mark of $780 million. Greater funeral and cemetery revenues stemming from solid preneed sales production boosted results.

Segment Discussion

Comparable Funeral revenues rose 1.5% on the back of higher general agency revenues and increased recognized preneed revenues. The latter was a result of higher non-funeral home sales production. Core revenues dipped 0.2% on account of lower core funeral services performed, partly cushioned by a rise in core average revenue per service.  

Comparable preneed funeral sales production grew 11.2%, driven by strength in core and non-funeral home channels. This, in turn, was fueled by newly introduced sales technology and new marketing campaigns.

Comparable funeral operating profit declined 3.4% to $90.0 million and the operating margin contracted 100 basis points (bps) to 19.6%. This was a result of higher funeral fixed costs, owing to escalated wages of customer-facing workers and unfavorable timing of self-insured medical claims. Moreover, increased selling and marketing expenses led to the drop in operating profit.

Comparable Cemetery revenues rose 3.6% year over year, courtesy of improved sales into the current developed property projects, cemetery property construction projects completion and greater income from endowment care trust fund.

Comparable preneed cemetery sales production jumped 3.6% on account of higher preneed property production and increased preneed merchandise and services production.

Comparable cemetery operating profit increased 6.1% to $97.2 million, with the respective margin expanding 70 bps to 30%. The upside was driven by higher revenues and impacts from the new accounting standard, somewhat negated by escalated labor expenses and greater investments in marketing programs and search engine optimization.

Costs

Adjusted general and administrative costs went down by $8.1 million, owing to lower costs associated with Service Corporation’s long-term and annual incentive compensation programs. Also, favorable year-over-year comparisons due to exceptionally high legal costs last year aided results this time.

Net hurricane costs through Jun 30 amounted to $1.9 million due to continued repairs at certain locations that were hit by the 2017 disruptions.

The company’s interest costs rose by $2.4 million due to higher interest rates on the company’s floating rate debt as well as increased total debt.

Other Financial Details

Service Corporation ended the quarter with cash and cash equivalents of $164.5 million, long-term debt of $3,493.7 million and total equity of $1,476.4 million.

Net cash from operating activities (excluding special items) amounted to $103.9 million in the second quarter, which was higher than the previous year, courtesy of lower cash taxes.

During the second quarter, Service Corporation returned $141 million to shareholders via dividends and share buybacks, while it returned $291.1 million in the first six months ended Jun 30.

Also, the company incurred capital expenditures of $140.5 million and $179.1 million on strategic acquisitions and construction of new funeral homes during the second quarter and first six months ended Jun 30, respectively.

Outlook

Management remains impressed with the solid earnings and cash flow growth witnessed in the quarter. This also enabled the company to take prudent capital initiatives and augment shareholders’ returns. Going ahead, the company remains focused on revenue growth by enhancing customer service, fortifying market share through boosting preneed sales, and utilizing its expanding scale and deploying capital to augment shareholders’ value.

Given these factors and anticipated gains from lower taxes, management raised its net cash from operating activities outlook for 2018 and now expects the same to range between $575 million and $615 million (up from the old guidance of $540-$600 million). The company now plans to allocate about $195 million (compared with $185 million) toward capital enhancements at existing facilities and cemetery development.

Adjusted earnings per share for the year is still envisioned in a band of $1.72-$1.90. Service Corporation expects adjusted earnings from continuing operations to grow at a rate, which is in line with its expected long-term growth rate of 8.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Service Corp. has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

The company's stock is suitable solely for value based on our style scores.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Service Corp. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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