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Service Corporation (SCI) Displays Bright Prospects Amid Risks

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Service Corporation International (SCI - Free Report) currently boasts solid prospects, driven by the steady demand for its products and services as well as its focus on expansion and strategic acquisitions. However, the company has been struggling with high corporate general and administrative costs for some time.

Zacks Investment Research
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This Zacks Rank #3 (Hold) company has a market capitalization of $10 billion. In the past three months, it has gained 0.7% compared with the industry’s growth of 3.1%.

Let’s delve deeper.

Factors Favoring Service Corporation

Service Corp. has been witnessing solid demand for its services owing to the increase in the number of funeral services. Also, the company’s comparable cemetery and funeral preneed sales production remains strong. For instance, in the first quarter of 2023, its revenues came in at $1,028.7 million, which beat the Zacks Consensus Estimate of $1,017 million. Notably, the company witnessed better-than-expected growth from the fourth quarter of 2019 (pre-pandemic period).

The company believes in strengthening its businesses by adding assets and building new funeral homes to generate greater returns. In first-quarter 2023, Service Corp. invested in new funeral and cemetery growth opportunities and accretive acquisitions. During the first quarter, it invested about $9 million to close three transactions in Connecticut, Louisiana and Pennsylvania. Over time, the company has made several notable buyouts, which include the likes of Alderwoods Group, Keystone North America, The Neptune Society and Stewart Enterprises.

In the first quarter, SCI incurred capital expenditures of $77.9 million, which included increased cemetery development expenditures, digital investments and corporate expenditures. For 2023, management expects to incur total maintenance, cemetery development and other capital expenditures of $290-$310 million.

Service Corp. believes in enhancing shareholders’ returns. In the first quarter, the company returned $207 million to shareholders via dividends and share buybacks. Previously, it also announced an 8% hike in its quarterly dividend, taking it to 27 cents per share. Healthy cash flow is likely to support returning more value to shareholders in the quarters ahead.

Factors Affecting the Company

The company has been subject to inflationary pressure for a while now. In the first quarter, it generated a gross profit of $289.1 million, reflecting a decrease of 23.3% from the year-ago quarter. Corporate general and administrative costs were $44.2 million, higher than $41.7 million in the previous year’s period. This increase was primarily attributable to higher workers’ compensation. Driven by these factors, operating income declined 26.7% to $245.6 million. Escalating costs and expenses, if not controlled, might weigh on the company’s margins and profitability in the quarters ahead.

Although demand for the company’s services remains strong, its revenues per service are being negatively affected by an increase in the cremation rate. Apart from this, management expects continued pressure from increasing interest costs on its variable-rate debt, which is expected to have a 25-cent negative impact on 2023 earnings per share.

Key Picks

Some better-ranked stocks are Celsius Holdings, Inc. (CELH - Free Report) , Conagra Brands, Inc. (CAG - Free Report) and Barfresh Food Group, Inc. (BRFH - Free Report) . While CELH sports a Zacks Rank #1 (Strong Buy), CAG and BRFH carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Celsius Holdings specializes in commercializing healthier, nutritional foods, beverages and dietary supplements. The Zacks Consensus Estimate for CELH’s current financial-year sales suggests 70.4% growth, while earnings per share are expected to rise by 154.4% from the corresponding year-ago reported figures. The company’s earnings surprise in the last reported quarter was 81.8%.

Conagra Brands operates as a leading branded food company in North America. The Zacks Consensus Estimate for CAG’s current financial-year sales and earnings per share suggests growth of 7.1% and 17%, respectively, from the corresponding year-ago reported figures. The company has a trailing four-quarter earnings surprise of 13.2%, on average.

Barfresh Food manufactures and distributes ready-to-blend beverages. The company’s earnings surprise in the last reported quarter was 0%. The Zacks Consensus Estimate for BRFH’s current financial year sales suggests growth of 33.8%, while earnings are likely to grow 53.7% from the prior-year reported numbers.

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