BOOX Research rates SCI as “underperform”

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BOOX Research provided an article to Seeking Alpha about Service Corporation International (SCI) that you can read here.  It’s important to note that this is only one article by one researcher, but their complex analysis ends up with a going forward rating on the public death care company of “Underperform”.

The very first page of the ten-page report, complete with diagrams and graphs, states “While we think this is a good business with solid financials, we think much of the growth story is behind it, and more importantly, already priced in.”

The article concludes on the 10th page with this quote, “Overall, SCI is a unique company in a complex industry with a number of changing trends and dynamics.  We officially rate SCI as “underperform” with long-term uncertainties and bearish trends, more than balancing its positive market leadership position and strong financial profile.”

Funeral Director Daily take:  Whether you want to agree with BOOX Research or not, this ten page report is a great read for anybody in the death care profession.  The report provides bullish and bearish cases for SCI and also does a great job of pointing out trends going on in the death care profession and how they may directly impact SCI.  Certainly, more than at any other time since I became a funeral director, it is fair to say that we are in a “complex” industry.

What is great about this article is that I believe that the bullish/bearish cases and the trends cited not only are applicable to SCI, but to all traditional family owned funeral homes in the United States.  For instance, the report states that they believe SCI has been “adapting well” to the two-decade shift in cremation growth.  However, they believe that adaption may not be enough as cremation seems to be growing even faster than SCI believed.  The report cites that for every 1% growth in cremation, SCI will lose $11 million in revenue and $8 million in EBITDA.

Have you thought about the long-term trends in revenue and EBITDA for your own firm as cremation continues to grow?

With graphics that point out SCI’s positioning and reducing the size of its funeral home assets in response to this shift, BOOX points out that SCI uses a 55% cremation rate as a marker and believes that SCI is not making the shift fast enough for NFDA’s industry estimate of an 80% cremation rate by 2035.

A slide provided by SCI in the report shows that as they have went from a 40% cremation rate to an almost 55% cremation rate that they would adjust their market by market footprint by reducing their facility number by about 25%, their vehicle fleet by about 33%, and their full-time equivalency employee rate by about 17%.   The company states that their 2018 cremation rate was 54.9% and BOOX contends about these shifts as they continue to grow, “SCI may not be prepared for such a swift acceleration ahead.”

BOOX says the bullish case for SCI is that acquisitions are still strong and their seems to be a strong preneed sales growth which is growing by 5-7% per year compared to at-need services growing only 1-2% per year.

The bearish case cited is that “the market is moving towards more affordable death care options on average, limiting organic revenue growth opportunities ” for SCI.  The article continues by saying, “The extensive funeral home assets SCI maintains could become increasingly obsolete over the next decade.”

Have you thought about your physical plant and what it will, in relative terms, cost to maintain per service as your sales become more affordable?

All in all, regardless of what you think about Service Corporation International and their stock price at this place in time, this is an excellent article, especially for funeral home owners, to read and then take stock of their own business in relation to the bullish side, the bearish side, and the industry trends that the writer sees.

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