Service Corp. (SCI) down 2.7% since last earnings report: can it rebound?


A month has passed since Service Corp’s last earnings report. (SIC). Stocks lost about 2.7% during this period, outperforming the S&P 500.

Will the recent negative trend continue until its next earnings release, or will Service Corp. should experience a breakout? Before we dive into the reaction of investors and analysts lately, let’s take a look at the latest earnings report to better understand the important factors.

Service Corporation’s best estimates of earnings for the first quarter, top view

Service Corporation International reported splendid results in the first quarter of 2022, with both upper and lower results beating the Zacks consensus estimate and increasing year-over-year.

Service Corporation posted adjusted earnings of $1.34 per share, beating Zacks’ consensus estimate of 99 cents. The metric rose 2 cents from the $1.32 reported in the prior year quarter. The rise can be attributed to higher gross profit (from recent buyouts and new builds) as well as fewer shares outstanding. Funeral and cemetery units provided solid performances.

Total revenue of $1,112.4 million increased 3.2% year over year. The rise can be attributed to increased income from funerals and cemeteries. The top line edged out the Zacks consensus estimate by $1,023 million.

Gross profit decreased to $376.9 million from $382.4 million in the prior year quarter. The company’s general and administrative expenses remained in line with the $41.7 million level in the period a year ago. Operating profit of $335.7 million increased from $342 million in the prior year quarter.

Interest expense increased by $3.2 million to $39.0 million during the first quarter of 2022, primarily due to the issuance of fixed rate bonds in 2021.

Consolidated funeral revenue was $649.1 million, compared to $619.4 million in the prior year quarter. Total comparable funeral products increased by 2.9%, driven by growth in basic funeral products as well as recognized provident insurance products. Basic funeral revenue growth (of 1.7%) was driven by an increase in average basic revenue per service, partially offset by lower basic funeral services provided, with the comparable basic cremation rate increasing by 120 basis points (bps). Recognized pension income increased by 2.9%. Like-for-like production at avant-garde funeral sales increased by 16.7%. The benefit can be attributed to an increase in sales velocity and averages as the business continues to earn high leads.

Comparable funeral gross profit fell $2.1 million to $193.4 million. Gross margin percentage was 30.4%, down 120 basis points year-on-year. Funeral margins were impacted by increased costs resulting from the normalization of staff and service levels as well as higher incentive compensation.

The cemetery’s consolidated revenue was $463.3 million, compared to $458.5 million in the prior year quarter. Cemeteries comparable revenue increased 0.2% due to an increase in other revenue, largely offset by a decline in base revenue. Base revenue decreased due to lower needs assistance revenue and lower recognized life insurance revenue. The cemetery’s comparable gross profit decreased by $9.6 million to $178.5 million. The comparable gross margin percentage was 38.9%, down from 41% reported in the prior year quarter. The company experienced slight cost inflation and an increase in incentive compensation.

Same-store sales production for seniors’ cemeteries increased 10.9%, driven by higher quality sales averages and strong sales activity. Comparable production of provident cemetery sales benefited from a more productive and efficient sales force. Sales averages achieved through continued investment in high quality inventory at moderately increased prices.

Other financial details and tips

The company ended the quarter with cash and cash equivalents of $300.6 million, long-term debt of $3,962.9 million and total equity of $1,842.6 million. Net cash from operating activities was $332.2 million during the three months ended March 31, 2022. During the same period, the company incurred capital expenditures of $56.7 million of dollars.

Management raised its 2022 net income and adjusted cash flow guidance, reflecting strong first-quarter earnings, driven primarily by increased funeral services as well as increased cemetery sales. Other than that, management has increased its estimates of production from cemetery sales and cemetery revenue for the remainder of 2022.

The company expects the midpoint of adjusted earnings per share (EPS) to be $3.50 compared to the $3.00 earnings previously forecast. The company sees Adjusted EPS in the $3.00-$3.70 range in 2022, compared to the previous view of the $2.80-$3.20 range. We note that the company’s earnings were $4.57 per share in 2021.

Net cash provided by operating activities (excluding special items) in 2022 is expected to be between $750-800 million now, versus $675-725 million previously forecast. Management expects capital improvements at existing sites and cemetery development expenditures in the range of $270 million to $290 million during this period.

How have the estimates changed since then?

Over the past month, investors have witnessed an upward trend in the revision of estimates.

The consensus estimate changed by 13.1% due to these changes.

VGM Scores

Currently, Service Corp. has a good growth score of B, although it lags a bit on the Momentum score front with a C. Tracing a somewhat similar path, the stock has been given a B rating on the side of value, placing it in the top 40% for this investment strategy.

Overall, the title has an overall VGM score of B. If you’re not focused on a strategy, this score is the one you should be interested in.

Outlook

Estimates have been on the rise for the stock, and the magnitude of these revisions looks promising. It comes with a little surprise that Service Corp. has a Zacks Rank #2 (Buy). We expect above-average performance for the stock over the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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