Why Is Service Corp. (SCI) Up 0.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Service Corp. (SCI). Shares have added about 0.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Service Corp. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Service Corporation Q1 Earnings Beat Estimates, Sales Miss

Service Corporation International reported mixed financial numbers for first-quarter 2019. While the company’s earnings surpassed the Zacks Consensus Estimate, revenues missed. However, the top line increased on a year-over-year basis. The quarterly results gained from strong performance in the cemetery category. Let’s take a closer look.  

Q1 in Detail

Service Corporation reported adjusted earnings of 47 cents per share, exceeding the Zacks Consensus Estimate of 41 cents. However, the bottom line remained unchanged from the year-ago quarter. Strength in comparable cemetery revenues, efficient cost management and reduced tax rate were offset by lower profits at the funeral segment. This in turn stemmed from tough year-over-year comparison, owing to the presence of a strong flu season last year.
 
Adjusted effective tax rate was 21.4% in the first quarter of 2019 compared with 25.8% in the same period last year.

Total revenues of $798.2 million inched up 0.5% from $794.5 million in the year-ago quarter. Improved cemetery revenues aided the top line. However, the figure came below the consensus mark of $807 million.
 
General and administrative costs increased nearly $7.7 million to reach $42.5 million, owing to higher legal settlement costs. The company’s interest costs rose $3.8 million to $47.4 million, due to higher interest rates on its floating rate debt and increased total debt.

Segment Discussion

Comparable Funeral revenues declined 5.5%, owing to lower core revenues. Core revenues declined as a result of lower funeral services performed and reduced average revenue per service conducted. Moreover, revenues in this category were dented by the absence of last year’s strong flu season. Recognized preneed revenues declined on fewer contracts sold.

These downsides were partly compensated by increase in other revenues, driven by rise in General Agency revenue. Comparable preneed funeral sales production increased 2.3%, driven by growth in core locations.

Comparable funeral operating profit declined approximately 14% to $104.8 million and the operating margin contracted nearly 210 basis points (bps) to 21.7%. The downside resulted from lower core revenues, partially offset by decrease in fixed costs.

Comparable Cemetery revenues rose 7.5% year over year, courtesy of higher recognized preneed revenues, partially offset by decline in at-need cemetery revenue. Comparable preneed cemetery sales production grew 6.3% on account of mid-single digit increase in both preneed property production and preneed merchandise and service-sales production.

Comparable cemetery operating profit rose around 15% to $86.5 million, while the respective margin expanded 190 bps to 28.8%. This upside was driven by higher recognized preneed revenues and income from endowment care trust.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $153.7 million, long-term debt of $3,409.2 million and total equity of approximately $1,700.4 million.

Net cash from operating activities (excluding special items) amounted to $184.9 million in the quarter, compared with $211.5 million in the prior-year period. The decrease was due to lower funeral operating profit and improved working capital.

During the first quarter, Service Corporation returned $47.4 million to its shareholders via dividends and share buybacks, and invested $26.3 million of capital into accretive acquisitions and building new funeral homes. Also, the company incurred capital expenditures of $51.6 million during first-quarter 2019.

Outlook

Management expects the company to be well positioned for long-term growth of 8, backed by dedicated workforce, solid operating platform and a healthy financial position. It plans to continue deploying capital efficiently to augment shareholders’ value.

The company reiterated its guidance for 2019. It continues to expect adjusted earnings per share for 2019 in the range of $1.84-$2.02. Further, management anticipates net cash from operating activities (excluding special items) between $550 million and $610 million. The company plans to allocate about $195 million toward capital enhancements at existing facilities and cemetery development.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Service Corp. has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Notably, Service Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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