Service Corporation International (SCI) is the largest provider of deathcare products and services in North America, offering a comprehensive portfolio of funeral, cremation, and cemetery solutions that have redefined the industry landscape. With a rich history spanning over nine decades, SCI has established itself as a trusted partner for families navigating the most challenging times, delivering exceptional service and personalized experiences that honor and celebrate life.

Company History and Growth

Incorporated in 1962, SCI's origins can be traced back to a single funeral home founded in 1910 in Houston, Texas. Over the decades, the company has grown organically and through strategic acquisitions, amassing a vast network of over 1,500 funeral service locations and 494 cemeteries across 44 states, 8 Canadian provinces, the District of Columbia, and Puerto Rico. This unparalleled geographic reach allows SCI to serve a diverse customer base, catering to the unique needs and preferences of communities nationwide.

In the early years, SCI faced challenges common to any growing business, including integrating new acquisitions and establishing a strong brand presence. However, the company was able to capitalize on demographic trends and growing demand for its services, allowing it to steadily expand its footprint across North America. A notable milestone for SCI was in the late 1990s, when it acquired several major funeral home and cemetery operators, significantly increasing the company's scale and market share. This acquisition strategy allowed SCI to gain operational efficiencies and establish itself as the clear industry leader.

Innovation and Adaptability

At the heart of SCI's success lies its commitment to innovation and adaptability. The company has consistently invested in digital technologies, enhancing its customer-facing platforms and optimizing internal operations to drive efficiency and elevate the client experience. This focus on innovation has enabled SCI to stay ahead of evolving consumer trends, such as the rising preference for cremation, by developing tailored merchandise and services that cater to these changing preferences.

Financials

SCI's financial performance has been impressive, reflecting the resilience and adaptability of its business model. As of the most recent fiscal year (2023), the company reported annual revenue of $4.10 billion and net income of $537.32 million, underscoring its ability to navigate economic challenges and deliver consistent returns to its shareholders. The company's robust cash flow generation, with operating cash flow of $869.04 million and free cash flow of $507.25 million, further strengthens its financial position and supports strategic investments in growth initiatives.

In the most recent quarter (Q3 2024), SCI reported revenue of $1.01 billion, representing a year-over-year increase of $12.1 million or 1.2%. This growth was primarily driven by a $7.0 million increase in comparable funeral revenue and a $0.9 million increase in comparable cemetery revenue. However, net income for the quarter decreased by $4.14 million or 3.4% compared to Q3 2023, primarily due to higher corporate general and administrative expenses, partially offset by a lower effective tax rate and lower share count.

One of the key drivers of SCI's financial success has been its diversified revenue streams, which include both at-need and pre-need offerings. The company's pre-need business, which allows customers to plan and purchase funeral and cemetery services in advance, has proven to be a reliable source of recurring revenue, contributing to the stability and predictability of SCI's overall financial performance. As of the latest reporting period, the company's pre-need backlog stood at an impressive $15.99 billion, providing a solid foundation for future growth.

SCI operates in two main business segments: Funeral and Cemetery. In the Funeral segment, consolidated funeral revenue was $1.74 billion for the first nine months of 2024, up from $1.73 billion in the same period of 2023. However, comparable funeral gross profit decreased 9.7% to $338.1 million, with the gross profit percentage declining from 21.8% to 19.7%. In the Cemetery segment, consolidated cemetery revenue was $1.36 billion for the first nine months of 2024, up 3.3% from $1.31 billion in the prior year period. Comparable cemetery gross profit increased 1.9% to $438.6 million, though the gross profit percentage declined slightly from 32.8% to 32.6%.

Geographically, SCI generates the majority of its revenue in the United States. In the first nine months of 2024, the company generated $2.93 billion in revenue from the U.S. and $164.97 million from Canada.

Liquidity

SCI's commitment to shareholder value creation is evident in its prudent capital allocation strategy. The company has consistently returned capital to its shareholders through a combination of dividends and share repurchases, with the quarterly dividend currently standing at $0.30 per share. Additionally, the company has maintained a healthy balance sheet, providing the financial flexibility to pursue strategic acquisitions and investments that align with its long-term growth objectives.

As of September 30, 2024, SCI reported a debt-to-equity ratio of 2.97, cash and cash equivalents of $185.42 million, and available credit under the Bank Credit Facility of $1.35 billion. The company's current ratio stood at 0.52, and its quick ratio was 0.48, indicating a relatively tight liquidity position that is not uncommon in the industry due to the nature of pre-need sales and trust arrangements.

Challenges and Resilience

Despite the inherent challenges of the deathcare industry, such as fluctuations in mortality rates and evolving consumer preferences, SCI has demonstrated its ability to adapt and thrive. The company has faced challenges including navigating regulatory environments and addressing operational issues such as staffing and supply chain disruptions, but SCI has demonstrated resilience in managing these headwinds.

In July 2019, SCI faced legal scrutiny when the California Attorney General alleged that the allocation of prices among certain of SCI's cremation service contracts and cremation merchandise contracts, and the related preneed trust funding, violated California law. SCI has since settled the lawsuit, agreeing to pay $23 million in civil penalties and provide certain preneed contract consumers the right to receive refunds. This incident underscores the importance of regulatory compliance and ethical business practices in the industry.

Throughout its history, SCI has maintained a focus on providing exceptional service to client families, while also striving to be a good corporate citizen in the communities it serves. The company's proven track record, industry-leading market position, and robust financial foundation position it well to navigate the dynamic landscape and continue delivering value to its stakeholders.

Future Outlook

As SCI looks to the future, the company remains focused on leveraging its extensive network, innovative capabilities, and strong brand reputation to further solidify its position as the premier provider of deathcare services in North America. The company's recent performance and guidance provide insight into its near-term expectations and long-term strategy.

For Q3 2024, SCI generated adjusted EPS of $0.79, which was $0.01 higher than the prior year quarter. The company had a very active quarter on the business acquisition front, investing $123 million to acquire 10 funeral homes and 2 cemeteries in top-tier metropolitan markets. Additionally, SCI invested an additional $31 million in real estate transactions for the expansion of their footprint of funeral homes and cemeteries in existing markets.

Looking ahead to Q4 2024, SCI expects adjusted EPS of $1.00 to $1.10, representing expected growth of 8% to 18% compared to $0.93 in Q4 2023. The company anticipates growing both comparable funeral and cemetery margins in Q4 2024, primarily from higher general agency revenues and favorable impacts from the pre-need backlog and endowment care fund trust income.

For the full year 2024, SCI has raised the midpoint of their adjusted cash flow from operations guidance range from $930 million to $950 million, to a new range of $940 million to $960 million. The company's expectation for total maintenance capex guidance remains unchanged for full year 2024 at about $325 million.

Looking ahead to 2025, SCI is optimistic about returning to earnings per share growth towards the higher end of their historical annual guidance of 8% to 12%. The company anticipates funeral volumes to stabilize compared to 2024 levels and pre-need cemetery sales production to return to low to mid-single-digit percentage growth. SCI is highly confident in growing general agency revenues impressively with their new pre-need insurance marketing agreement. The company also expects the negative effects of higher interest rates and lower SCI Direct profits in 2024 to turn positive in 2025, and the contributions from the 2024 acquisitions to provide another positive trend for 2025.

With a steadfast commitment to excellence, a deep understanding of its customers' needs, and a relentless pursuit of growth, SCI is poised to write the next chapter in its storied history as a true titan of the deathcare industry. The company's ability to adapt to changing market conditions, invest in strategic acquisitions, and maintain a strong financial position bodes well for its continued success in the years to come.