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Why Is Service Corp. (SCI) Up 7.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Service Corp. (SCI - Free Report) . Shares have added about 7.3% 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 Q3 Earnings Lag, Revenues Beat

Service Corporation marked its first earnings miss in third-quarter 2018. Adjusted earnings increased 6.1% year over year to 35 cents per share, though it came a penny below the Zacks Consensus Estimate.  The year-over-year upside was backed by solid operating profit, lower adjusted tax rate and reduced share count, partly offset by escalated general and administrative costs and increased interest expense.

Adjusted effective tax rate was 17.6% in the third quarter of 2018, compared with 19.5% in the same period last year.

Total revenues came in at $778.8 million, up 6.5% from $731.3 million recorded in the year-ago period. Moreover, the figure surpassed the consensus mark of $762 million. Greater funeral and cemetery revenues boosted results.

Segment Discussion

Comparable Funeral revenues rose 1.9% on the back of higher general agency revenues and increased recognized preneed revenues. The latter was a result of greater contracts sold through the company’s non-funeral home sales network. Core revenues remained nearly flat as a rise in core average revenue per service was negated by lower core funeral services performed.  

Comparable preneed funeral sales production grew 13.6%, driven by strength in core and non-funeral home channels. This, in turn, was fueled by newly introduced consumer-facing technology, along with digital marketing campaigns, website remodeling and optimization of search engine.

Comparable funeral operating profit declined 4.4% to $67.5 million and the operating margin contracted 100 basis points (bps) to 15.4%. This was a result of higher funeral fixed costs, owing to escalated wages of customer-facing workers and increased self-insured medical claims. Moreover, increased selling and marketing expenses led to the drop in operating profit.

Comparable Cemetery revenues rose 9.9% year over year, courtesy of improved sales production, cemetery property construction projects completion and greater income from endowment care trust fund.

Comparable preneed cemetery sales production jumped 5.4% on account of higher preneed property production, and increased preneed merchandise and services production.

Comparable cemetery operating profit surged 21.2% to $96.1 million, with the respective margin expanding 280 bps to 29.9%. The upside was driven by higher revenues, somewhat negated by escalated labor expenses greater digital marketing investments and increased self-insured medical claims.

Costs

Adjusted general and administrative costs went up by $13.6 million, owing to higher costs associated with Service Corporation’s long-term incentive compensation program.

The company’s interest costs rose by $3.7 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 $158.3 million, long-term debt of $3,542.3 million and total equity of approximately $1,489 million.

Net cash from operating activities (excluding special items) amounted to $136.9 million in the quarter, which was lower than the previous year, due to higher cash taxes. Also, lower preneed working capital was responsible for this downside.

During the third quarter, Service Corporation returned $77.6 million to shareholders via dividends and share buybacks, while it returned $368.7 million in the first nine months ended Sep 30.

Also, the company incurred capital expenditures of $63.1 million and $165.9 million during the third quarter and first nine months ended Sep 30, respectively.

Outlook

Management remains impressed with the solid revenue and operating profit growth and expects the strong operating performance to continue into the fourth quarter. Going ahead, the company remains focused on its long-term growth strategy and is on track to augment revenues, utilize its expanding scale and deploy capital efficiently to augment shareholders’ value.

Management continues to expect net cash from operating activities for 2018 to range between $575 million and $615 million. The company still plans to allocate about $195 million toward capital enhancements at existing facilities and cemetery development. Adjusted earnings per share for the year is now envisioned in a band of $1.77-$1.85, compared with the previous range of $1.72-$1.90.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Service Corp. has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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