Seeking Alpha on SCI: “Negative scenario could be favorable for this industry consolidator”
This morning’s edition of Funeral Director Daily looked at the situation that death care companies could be in if inflation and the high interest environment we are in stay with us for some time. Interestingly enough, Seeking Alpha author Gustavo Larraga Tapia published an article last week where he opined that death care industry leader Service Corporation International (SCI) could turn that situation into a favorable situation for their long-term prognosis.
You can access the entire article here:
First of all, here’s what Larrage Tapia says are the risks to the industry moving forward:
Cremation Trends: “Managing this shift in the industry is a challenge, but it could also present an opportunity for SCI to continue consolidating the sector by acquiring independent funeral homes affected by this trend.”
Economic Factors: “SCI’s business is sensitive to economic conditions. Economic downturns can lead to reduced demand for funeral and cemetery services, as families may opt for less expensive options or delay funeral arrangements. An example of this is the company’s experience during the 2008 financial crisis. Between 2007 and 2010, revenues decreased by 4% in total, and in 2008, the EBIT margin was reduced from 15% to 13%.”
High-Interest Rates: “This can impact SCI in terms of its financing costs. If SCI carries debt, higher interest rates can increase its financing costs, potentially reducing profitability. In a company with such high leverage ratios, this is even more concerning. Additionally, high interest rates can discourage consumer borrowing, which might affect families’ ability to finance funeral expenses or pre-need contracts, potentially impacting SCI’s revenue.”
Larraga Tapia goes on to tell why he thinks that in their specific situation SCI could benefit from these issues over the long-term. For instance, as to the cremation trend he theorizes that “This shift in trend (cremation) could be one reason why small funeral homes may encounter challenges due to reduced (traditional funeral) demand, leading some to close or sell their businesses to large consolidators, such as SCI itself.”
As for higher than recent interest rates and that effect on SCI he makes a point about SCI’s history with the issue, preneed funds, and the “predictable” pattern of the death care industry when he says this, “The company typically maintains Net Debt/EBITDA ratios between 3x and 4x. The ten-year average is 3.75x, and at the end of FY2022, it was 3.45x. . . . Although this might seem high, the company has a strong history of managing debt even in challenging environments, as demonstrated during the financial crisis of 2008. Moreover, because it operates in a highly predictable business and typically receives cash in advance, it is easier to anticipate potential crises and make informed decisions based on this predictability.”
Funeral Director Daily take: A good, albeit one man’s opinion, article on the leading company in our profession. There’s probably something for everyone to glean from this article and worth the while for a five-minute read.
To Larraga Tapia’s point about “operating in a predictable business”, I’ve often thought that about the business of a funeral home. We don’t have a “rush” on inventory or products and we don’t rely on the delivery and obsolesence of things such as semiconductors to operate our business.
I’ve always thought that the funeral business gets time to get things right. It’s just a matter of making sure that we identify the trends coming and make the right adjustments in due time. The “predictability of the business” allows us the time to think those adjustments through. Of course, if you are one that doesn’t want to see changes coming then you won’t make the necessary adjustments that need to be made over the life of a business.
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