November 05, 2018 - 12:48pm EST by
2018 2019
Price: 43.00 EPS 1.81 2.16
Shares Out. (in M): 181 P/E 23.8 19.9
Market Cap (in $M): 7,750 P/FCF 20.0 17.8
Net Debt (in $M): 3,453 EBIT 631 712
TEV (in $M): 11,203 TEV/EBIT 17.8 15.7

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  • Bright Side of Life


SCI has been written up in the past on VIC and I suggest you look at those write-ups for background, the business model has not changed much since then.  You can access background on the accounting by going to the following Link , and opening the 2018 Deathcare Accounting White Paper.


Thesis- I believe that SCI is on the cusp of material positive earnings revisions.  One can make the argument that shares are rich for LT 8-12% EPS growth, and if that is indeed your stance then the remainder of this write-up will not be useful for you.  However, if you are comfortable with the multiple, then I think you could see >20% upside in the next twelve months, while also having below average downside risk. During the two periods of market decline this year, SCI averaged ½ of the overall market decline.  The company is also not tethered to the economy, as >60% of sales are driven by the rate of deaths. My upside view is predicated on the company’s new sales technology driving material cemetery sales starting in 2019.


New Sales Technology-  SCI is trying to utilize its scale to strengthen its lead over others in the industry.  One area management has continued to invest behind is technology. The company has been trying its best to bring the process of selling services and products for atneed and preneed into the more modern age.  The company implemented salesforce in 2014, and introduced a new atneed oriented product, HMIS+, which was rolled out in 2016. Fast forward to today, and the company has now begun implementing Beacon, which is a technology tool used for selling preneed services. Beacon displays the various options available to the customer, creates a contract, and also accepts payment- this is a much more streamlined process compared to the prior method.


Here are a few slides from the company’s Investor Day earlier this year:

Source: Company Filings

Source: Company Filings

Beacon began being rolled out in early 2018 in funeral homes only.  In the second quarter the company began to call out the positive impact they were seeing in funeral homes that utilized Beacon.  By Q2 the company suggested that they were 40% rolled out. In Q3 the company continued to call out the positive impacts of Beacon, suggesting that it alone drove a 7% y/y increase in preneed funeral sales production.  As of the end of the third quarter Beacon was in 878 funeral locations, 60% of the targeted rollout. 95% of all funeral locations will be live by the end of the year. So given 60% drove 7% consolidated production sales lift, those funeral homes with the service are seeing close to an 11% lift.


The following graph shows the preneed funeral lift the company has been witnessing this year.



Given the way the accounting works, preneed funeral production essentially builds a backlog of future business.  The sales impact is deferred until the client ultimately dies.


Cemetery preneed on the other hand is almost entirely recognized at the time of sale (cemetery sales in backlog as a percentage of total backlog was 26% at YE 2017).  Beacon is expected to begin rolling out to the cemetery business in 2019 (will likely not be completed within 2019). On the most recent earnings call the company stated that they see no reason why they shouldn’t see a comparable lift.  The base business is expected to grow EPS 8-12% over the long-term and during the Q3 call management suggested that they see no reason why that wouldn’t be the case again in 2019. I think Beacon will add to this EPS growth.  


Management suggests cemetery incrementals would be between 65% and 70%. The chart below shows the rolling 12 month incrementals in the cemetery business.



Using a 65% incremental and a 7% sales bump of preneed cemetery sales (not total cemetery sales) would drive $30 million in after tax profit, or $0.16 in EPS.  The company is likely to generate approximately $1.81 this year, and assuming LT trends are similar for next year, will likely generate $2.00. Indeed that is right where consensus is for 2019.  However, given the Beacon rollout I think it will likely be closer to $2.20.


Is this well known?  As can be seen in the chart below, estimates haven’t budged for 2019.   The multiple has expanded since the Q2 call, however, I think it hasn’t expanded as much as it should given the EPS growth expected.  The last graph below shows the multiple expansion that occurred during the last cycle of strong preneed cemetery production in 2015.