Service Corporation International (SCI - Free Report) has been in investors’ good books, courtesy of its focus on acquisitions, demographic trends and strong funeral service revenues. These upsides have helped this Zacks Rank #3 (Hold) stock to rally 27.8% in a year, easily outpacing the industry’s growth of 15.7%.
However, intense competition from cremations is a trouble for Service Corporation, given consumers’ rising inclination toward cremations over traditional burials. This, in fact, has been a worry for the funeral services industry in general. Let’s weigh both sides of the coin and see if Service Corporation can sustain growth.
Factors Driving Service Corporation
Service Corporation is committed toward pursuing strategic buyouts for both its segments and building new funeral homes to generate greater returns. Also, buyouts in the cemetery segment are aimed at exploiting increased opportunities to cater to Baby Boomers. The company has a solid record of making and integrating prudent businesses. Some notable acquisitions made by the company are Alderwoods Group (2006), Keystone North America (2010), The Neptune Society (2011) and Stewart Enterprises (2013).
Further, the company is focused on boosting revenues, utilizing scale and deploying capital, efficiently. Service Corporation concentrates on catering to the changing consumer needs and utilizing its robust scale to drive preneed sales at 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 are tailwinds to the company’s revenues. Markedly, Service Corporation is well positioned to continue gaining from the aging Baby Boomer population, which is fueling the company’s preneed cemetery sales programs, and is expected to boost its preneed and atneed funeral results further.
Thanks to such endeavors, Service Corporation’s comparable funeral service revenues have been growing year over year for three straight quarters, with an increase in comparable funeral preneed sales production. In the second quarter of 2018, comparable funeral sales 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. Further, 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.
Intense Competition, Increased Cremations Hurt
Service Corporation has been witnessing a rising trend in the number of cremations as another option to the traditional funeral service. Well, the company’s average revenues from cremations with service are usually lower compared to that for traditional burials. Markedly, the proportion of cremation cases in Service Corporation’s comparable services has risen from 51.7% in 2015, to 52.6% in 2016, to 53.5% in 2017. Continuance of such trends is a threat to the company’s overall performance.
Also, the funeral and cemetery industry is quite competitive and the company competes with various locally-owned, independent operators on grounds of standard, products and pricing. In fact, the company has faced pricing pressure in the past from independent funeral service location and cemetery operators, monument dealers, casket retailers, low-cost funeral providers, and more. Also, use of alternative channels, such as e-commerce, to buy funeral related products has increased competition. Failure to keep up with the pressure may hurt the company’s financial results and cash flow.
Nonetheless, Service Corporation’s strategic growth endeavors and demographic trends are likely to work in its favor and help it tide over these obstacles.
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