Executive Summary / Key Takeaways

• Service Corporation International (SCI) demonstrates robust financial health and strategic resilience, underpinned by its market leadership in deathcare and a substantial $16.8 billion preneed backlog, which provides predictable future revenue.
• The company is strategically adapting to evolving consumer preferences, particularly the rising cremation trend, by enhancing memorialization offerings and leveraging technology to improve customer experience and operational efficiency.
• A significant transition of its preneed funeral sales model, including SCI Direct's shift to insurance-funded contracts, is expected to drive "incredibly impressive" long-term earnings growth as higher-value contracts mature from the backlog, despite temporary near-term production slowdowns.
• SCI maintains a disciplined capital allocation strategy, prioritizing high-return acquisitions and greenfield developments, alongside consistent shareholder returns through dividends and share repurchases, supported by strong operating cash flows.
• Management's 2025 outlook projects normalized EPS growth of 9% (or 12% neutralizing tax rate impacts) and raised cash flow guidance, with expectations for continued low to mid-single-digit growth in preneed cemetery sales and a return to growth for preneed funeral sales in 2026.

The Enduring Business of Dignity: SCI's Strategic Foundation

Service Corporation International (NYSE:SCI) stands as North America's preeminent provider of deathcare products and services, a position meticulously built since its incorporation in 1962. Operating an expansive network of 1,487 funeral service locations and 499 cemeteries across 44 U.S. states, eight Canadian provinces, the District of Columbia, and Puerto Rico, SCI's scale is unmatched. This extensive footprint, including 312 combination locations, enables the company to serve approximately 700,000 families annually under its Dignity Memorial brand, offering a comprehensive suite of funeral, cremation, and cemetery services, both at the time of need and through prearrangement.

The core of SCI's enduring investment thesis lies in its strategic focus on preneed sales. This model allows families to plan and fund arrangements in advance, providing peace of mind while simultaneously building a substantial backlog of future revenue for SCI. As of September 30, 2025, this backlog stood at an impressive $16.80 billion, a critical asset that enhances the stability and predictability of the company's financial performance. While revenue from most preneed merchandise and service sales is deferred until the time of need, preneed cemetery property sales offer opportunities for current revenue recognition once the property is developed and available for use. This dual approach to preneed sales is a significant differentiator in the fragmented deathcare market.

Technological Edge and Operational Innovation

SCI's competitive moat is not solely built on its physical presence but also on its strategic adoption and application of technology to enhance both customer experience and operational efficiency. The company leverages customer-facing technology to streamline processes, reduce administrative burdens, and allow families to visualize enhanced product and service offerings, particularly for cremation memorialization. This digital approach is expected to drive increases in the average revenue per cremation service in future periods.

Operationally, SCI utilizes technology to improve the efficiency of its sales process and alleviate burdens on caregivers and funeral directors. Management is actively exploring the integration of AI and other advanced tools at the home office level to optimize workflows and manage staffing needs more effectively, aiming to avoid additional hires. Significant digital investments are ongoing, with $6 million allocated in the third quarter of 2025 and a projected $25 million for digital strategy investments in 2025. These technological applications are foundational to SCI's strategy, contributing to its competitive advantage by improving service delivery, managing costs, and boosting sales productivity.

Beyond internal efficiencies, SCI is also adapting to broader industry technological trends. While not developing proprietary "green" technologies, the company is responsive to the growing demand for eco-friendly options. It offers eco-friendly urns and caskets and facilitates natural burials, aligning with consumer preferences for sustainability. The broader industry is seeing the emergence of alkaline hydrolysis ("water cremation"), which emits 80% less CO2 than traditional flame cremation and is permitted in 28 U.S. states, and Promession, a freeze-drying process gaining traction in Europe. SCI's strategic positioning allows it to integrate such offerings as they become more mainstream, ensuring it remains relevant to evolving consumer demands.

Competitive Landscape and Market Leadership

In the deathcare industry, SCI's scale and integrated service model provide a distinct competitive advantage over its rivals. Direct competitors like Carriage Services (CSV), StoneMor, Hillenbrand (HI) (Batesville segment), and Matthews International (MATW) each occupy specific niches. Carriage Services, a funeral and cemetery operator, offers regional agility, but SCI's larger network provides greater geographic coverage and economies of scale. SCI's national branding and diversified revenue streams offer superior resilience in shared markets, while its ability to offer bundled services across a wider geography differentiates it through convenience and brand recognition.

StoneMor, specializing in cemetery operations, offers niche expertise in memorialization. However, SCI's comprehensive funeral and cemetery services provide a more integrated approach, allowing for cross-selling and potentially greater value for customers. Financially, SCI generally exhibits stronger overall health, with higher profitability and cash flow generation from its broader revenue base compared to StoneMor's more volatile performance. Hillenbrand and Matthews International, primarily product suppliers, contrast with SCI's service-based model. While these companies may excel in manufacturing efficiencies or customized product innovation, SCI's direct customer interaction and end-to-end service ecosystem provide a stronger foundation for customer loyalty and recurring revenue.

SCI's asset clustering strategy in a fragmented market presents significant acquisition and cost-saving opportunities, allowing for continued expansion and market share growth. The company's strong preneed program historically has contributed to its ability to grow its overall market share. This strategic positioning, coupled with its financial strength, allows SCI to maintain a competitive edge in profitability and market share capture, even as it adapts to evolving consumer preferences and industry innovations.

Financial Performance and Operational Momentum

For the nine months ended September 30, 2025, consolidated net income attributable to common stockholders reached $383.20 million, or $2.68 per diluted share, an increase from $367.30 million, or $2.50 per diluted share, in the same period of 2024. This growth was primarily driven by higher gross profit in both the funeral and cemetery segments, partially offset by increased corporate general and administrative expenses and a higher effective tax rate.

Total revenue for the nine months ended September 30, 2025, grew to $3.20 billion, up from $3.09 billion in the prior year period. This was supported by a 3.94% year-over-year increase in funeral revenue to $1.80 billion and a 2.65% increase in cemetery revenue to $1.39 billion. Gross profit for the funeral segment increased by 8.63% to $369.55 million, with the gross profit percentage rising from 19.59% to 20.47%. Cemetery gross profit also saw a 3.20% increase to $458.84 million, maintaining a strong gross profit percentage of 32.94%.

Operating cash flow remains a fundamental strength, providing $729.90 million in the first nine months of 2025. This robust cash generation supports SCI's capital allocation priorities, including significant investments in acquisitions and new developments. The company's liquidity position is solid, with approximately $240 million of cash on hand and $1.2 billion available on its long-term bank credit facility as of September 30, 2025. Leverage stands at 3.6x net debt to EBITDA, comfortably within the target range of 3.5x to 4.0x.

A key operational shift is the ongoing transition of SCI Direct's preneed sales from a 100% trust-funded model to an insurance-funded one. While this transition, involving extensive training and licensing for sales counselors, has temporarily reduced non-funeral home preneed sales production by 20% in Q3 2025, management anticipates year-over-year growth to resume in early 2026. This move is expected to yield "incredibly impressive" earnings growth in the long term as higher-value insurance-funded contracts mature from the backlog. Similarly, an operational decision in 2024 to defer merchandise deliveries, such as urns, to the time of need is expected to cease impacting non-funeral home preneed sales revenue later in 2026, contributing to meaningful compounded growth in average revenue per service from the backlog.

Outlook and Strategic Initiatives

SCI's management has confirmed its normalized earnings per share guidance for 2025, narrowing the range to $3.80 to $3.90, with a midpoint representing 9% year-over-year growth. Neutralizing the impact of a higher effective tax rate (25-26% for 2025, up from 21.1% in Q3 2024, due to non-deductibility of certain excess tax benefits from stock option awards), the EPS growth would be 12%, aligning with the company's long-term growth framework of 8% to 12%. The cash flow outlook for 2025 has been raised to $910 million to $950 million, with a midpoint of $930 million, driven by stronger working capital trends and anticipated lower cash taxes due to newly enacted federal tax legislation. This translates to an impressive adjusted free cash flow of $615 million, or approximately $4.40 per share.

For the funeral segment, volumes in 2025 are projected to range from slightly down 1% to slightly up 1%, an improvement over 2024, as the "pull-forward effect" from COVID-19 becomes negligible. Management expects solid growth in average revenue per service and modest funeral revenue and gross profit growth in Q4 2025. Preneed funeral sales production, while slightly lower in 2025 due to the SCI Direct transition, is expected to return to low to mid-single-digit percentage growth in 2026.

In the cemetery segment, management anticipates low to mid-single-digit preneed sales production growth for 2025, leading to flat to low single-digit revenue growth in Q4 2025. This growth is supported by flexible financing plans, effective sales management, and a strategic focus on educating cremation consumers about cemetery memorialization options. SCI continues to invest approximately $160 million annually in high-return cemetery development projects.

Cost control remains a priority, with fixed cost growth managed below inflationary trends through staffing metrics and technology adoption. The company's capital allocation strategy continues to prioritize high-return investments, including $75 million to $125 million for acquisitions and $78 million for growth capital in new funeral home construction and real estate in 2025. Share repurchases remain a key component of capital returns, with $414.40 million remaining authorized as of September 30, 2025.

Risks and Challenges

Despite its strong position, SCI faces several risks. The temporary slowdown in SCI Direct's sales production during its transition to an insurance-funded model poses a near-term headwind. While deathcare services are generally resilient, broader economic pressures could impact discretionary purchases, particularly in the cemetery segment. Localized events, such as natural disasters like wildfires, can temporarily disrupt operations and sales, though preneed sales are typically deferred rather than lost.

The company is also exposed to potential increases in supply chain costs due to global trade disruptions and tariffs, particularly for merchandise like caskets, urns, granite, and bronze. However, SCI mitigates this by sourcing two-thirds of its materials domestically and through long-term production contracts. The ongoing moderation of the cremation rate increase, while reducing a historical revenue headwind, introduces a new dynamic to revenue forecasting. Furthermore, as a high fixed-cost business, efficient cost management is crucial to maintaining profitability.

Conclusion

Service Corporation International's investment thesis is rooted in its unparalleled market leadership, robust preneed sales backlog, and a proactive strategy to adapt to evolving industry dynamics. The company's disciplined approach to capital allocation, coupled with its focus on operational efficiency and technological integration, positions it for sustained long-term growth. While navigating the temporary impacts of its preneed sales model transition and broader macroeconomic uncertainties, SCI's ability to leverage its scale, enhance customer experience through technology, and strategically expand its footprint underscores its resilience. The anticipated return to growth in preneed funeral sales in 2026, combined with consistent cemetery segment performance and strong cash flow generation, suggests a compelling outlook for investors seeking stable, long-term value in the deathcare sector. SCI's commitment to shareholder returns and its strategic investments in high-return projects further solidify its position as a leader poised for continued success.