Description

Thesis: Service Corp International (SCI) is the largest owner of funeral homes and cemeteries in North America, holding ~15% market share. SCI is a steady compounder with a strong management team, steadily building toward a demographic bubble that will see revenue and margins accelerate higher.  All the while, SCI reliably repurchases its shares with FCF and leverages its scale to source accretive tuck-in acquisitions.  These acquisitions are then plugged into SCI’s system and can leverage its infrastructure and processes to cut costs and improve productivity.  From a valuation perspective, SCI's EBITDA multiple has historically tracked the S&P 500; though it has diverged in recent years.  SCI currently trades at 12x EBITDA, while the S&P 500 trades at 14x. With a MSD% free cash flow yield, SCI is attractive due to its stable growth profile and real estate-rich balance sheet. Management has efficiently utilized the balance sheet, maintaining leverage of 3.5x, buying back 5% of the stock's float annually, and maintaining a dividend yield of 1.5-2%. SCI should continue compounding EPS at a mid-teen percentage rate annually, driven by organic growth supplemented by tuck-in acquisitions and share buybacks.  Finally, SCI’s steady FCF and asset-rich balance sheet make it an ideal PE take-private candidate.  Recently, TPG acquired Invocare (IVC AU) for >14x EBITDA; and last year, Dignity (DTY LN) was taken private at a mid-teens EBITDA multiple.

Business Overview: The deathcare business is highly salesforce and consumer-oriented, with two primary revenue streams: "At-Need," driven by mortality rates and immediate family needs at the time of death, and "Pre-Need," where individuals in their 60s and 70s make arrangements in advance. The Pre-Need business is a discretionary consumer purchase.  This business has excelled for SCI, through its execution and salesforce best practices. Funds from Pre-Need sales are held in trust and invested, benefiting SCI through capital appreciation. This business has generated a backlog nearing $15 billion, nearly 4x current revenue. As demographics shift, SCI's growth in both Pre-Need and At-Need sectors will accelerate, unlocking backlog value at an increasing pace. While COVID caused a temporary volume spike, the impact of pull-forward has largely played out; and mortality driven volumes should grow at an LSD% rate near-term, before demographic cause an accelerating over the next several years.

In total, SCI operates 1,500 funeral service locations and 500 cemeteries, including 300 combination locations where funeral homes and cemeteries are co-located. These facilities span across 44 U.S. states, eight Canadian provinces, the District of Columbia, and Puerto Rico. SCI is most recognized for its Dignity Memorial brand, in North America. Other prominent brands under SCI’s umbrella include Dignity Planning, National Cremation Society, and Neptune Society. SCI’s operations are extensive, encompassing funeral service locations, cemeteries, combination locations, crematoria, and other related businesses. This extensive network allows SCI to meet a wide range of customer needs.

SCI provides comprehensive funeral services, including the use of funeral home facilities, professional service arrangements, directing services, removal, preparation, embalming, cremation, memorialization, visitations, travel protection, and catering. They also offer a wide array of funeral merchandise such as burial caskets, urns, outer burial containers, flowers, and personalized tribute items.

SCI’s cemetery operations offer cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization options. Cemeteries also provide related merchandise and services such as cemetery markers, outer burial containers, graveside services, and floral placements. Combination facilities where a funeral service location is integrated with or adjacent to an SCI-owned cemetery. This setup allows for shared resources and services, offering cost efficiencies and convenience to families who can manage all their funeral and cemetery needs at a single location.

Finally, SCI offers preneed contracts, which allow customers to prearrange funeral and cemetery services. These contracts contribute to a substantial preneed backlog, ensuring future revenue. The preneed sales program includes both trust-funded and insurance-funded contracts, providing financial security and peace of mind for customers.

History: SCI was incorporated in Texas in July 1962. The company's original strategy focused on achieving economies of scale by sharing resources such as preparation services, administration support, transportation, and personnel among funeral service locations. This operating strategy facilitated the acquisition of deathcare businesses across various markets over the subsequent decades. In 1993, SCI expanded internationally, acquiring major deathcare companies. However, by the late 1990s, the competitive nature of acquisitions led to higher prices and reduced returns. In 1999, SCI refocused on North America, divesting many international and some North American assets. It introduced the Dignity Memorial brand, the first transcontinental brand for deathcare services and products, in North America.  The early 2000s saw a rationalization of the deathcare industry’s torrid consolidation of the prior years.  Many operators restructured, and industry consolidation slowed in subsequent years.

From 2006 to 2013, SCI pursued a series of strategic acquisitions, including Alderwoods Group, Keystone North America, Neptune Society, Inc., and Stewart Enterprises, Inc. These acquisitions expanded SCI’s footprint and strengthened its market position. In April 2006, SCI announced the acquisition of Alderwoods for $1.2 billion, a 7.2x multiple based on estimated synergies of $60-70 million realized over 12-18 months.  In 2008, SCI bid to acquire STEI for $11/sh, but the bid was pulled as the credit crisis accelerated later in ’08.  In May 2013, SCI announced that it had reached an agreement to acquire STEI for $13.25.  After several months of negotiations with the FTC over divestitures, the transaction closed in December 2013.  The STEI acquisition for $1.4 billion, a 7.9x multiple based on estimated synergies of $60 million realized over 24 months, was a similar playbook to Alderwoods.  While large digestible acquisitions are no longer an obvious opportunity for SCI, smaller tuck-in acquisitions will continue to supplement SCI’s growth algorithm. 

Strategy: SCI's growth strategy centers on three core principles: increasing revenue, leveraging scale, and investing capital. To grow revenue, SCI adapts to changing customer preferences through price, product, and service differentiation. It uses its extensive network and technological advancements to enhance efficiency and the customer experience. Capital investments focus on acquisitions, new developments, and returning value to shareholders through dividends and share repurchases. SCI has also driven growth and improved customer experience by leveraging its size and scale, particularly through significant investments in technology and strategic initiatives. Key digital transformations include the Atneed Point of Sale System (HMIS+), which offers high-resolution videos and photographs for seamless product presentation, and the Mobile Preneed Sales System (Beacon), enabling customers to view digital presentations of services and merchandise from their homes. Additionally, SCI has modernized its Dignity Memorial location websites, making them user-friendly, mobile-optimized, and rich with features like interactive obituaries, personalized content, and online appointment scheduling. Digital surveys and online reviews further enhance customer engagement by providing quick feedback and improving response times to concerns.

Conclusion: While SCI is not discounted in terms of its standalone valuation, its relative valuation (to the S&P 500) suggests further multiple upside.  In the absence for multiple expansion, SCI’s EPS growth algorithm should drive healthy mid-teens % returns for the stock in years to come.  Risks to the thesis include (i) consumer spend exposure through preneed business, (ii) short-term fluctuations in mortality volumes, and (iii) headline risk should regulators refocus efforts on any deathcare industry practices.

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Catalyst

PE take-private
Ongoing share repo
Tuck-in acquisitions