Service Corporation International SCI, a dominant player in the North American deathcare industry, is well-positioned to benefit from the essential nature of its services, which remain resilient during economic downturns. The company’s diverse portfolio, including traditional and modern burial and memorial services, caters to a wide range of consumer preferences, creating multiple revenue streams. 

The ongoing demographic shift, particularly the aging of the baby boomer generation, presents a strong tailwind, ensuring sustained demand for SCI’s offerings in the coming years. However, the company faces several challenges that could impact its short-term performance. Let’s delve deeper.

SCI’s Key Strengths

Service Corporation’s diversified offerings cater to various consumer preferences, from traditional burial services to lower-cost cremation options. Its diverse portfolio of services, including at-need and pre-need funeral and cemetery offerings, helps capture multiple revenue streams. 

With a significant portion of the U.S. population residing in urban and suburban areas, Service Corporation’s strategic investments in cemetery properties in metropolitan regions like California, Florida and Texas position it well to meet the demands of urban consumers. Land scarcity in urban centers increases the value of premium burial plots, offering the company opportunities to generate higher-margin revenues from its cemetery inventory. Service Corporation’s focus on developing exclusive memorial estates and high-end burial options caters to affluent demographics seeking personalized and premium services. 

Service Corporation has demonstrated a disciplined and aggressive approach to expansion, allocating significant resources to strategic acquisitions and capital projects that position the company for sustained growth. In the third quarter of 2024, the company invested $123 million in acquiring 10 funeral homes and two cemeteries, focusing on high-growth metropolitan markets. This strategy ensures that SCI not only expands its footprint but also reinforces its position as the market leader in North America. 

Service Corporation’s $16 billion pre-need backlog (per the third-quarter earnings call) underscores its ability to generate steady and predictable revenue streams over the long term. Pre-need contracts allow customers to lock in funeral and cemetery services in advance, mitigating price volatility and providing financial stability to the company. As more consumers recognize the benefits of pre-planning, Service Corporation is well-positioned to capture this growing segment of the market.

SCI Price Performance vs. Industry

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Near-Term Challenges for Service Corporation

Service Corporation reported flat cemetery revenue growth in the third quarter of 2024, with a decline in pre-need cemetery sales production due to weak large sales activity and delays in key location developments, such as at Rose Hills.

The company also experienced a 50-basis point margin compression in its funeral segment as inflationary pressures outpaced revenue growth. Rising operating expenses, particularly corporate general and administrative costs, further hinder profitability, reducing the company’s ability to invest in growth initiatives. Apart from this, SCI is up against tough year-over-year comparisons, as the pandemic-driven surge in funeral volumes and pre-need sales creates a high benchmark for growth. The fading impact of the pandemic could make it challenging for SCI to achieve growth targets in the near term.

Final Thoughts on SCI

Service Corporation looks well-positioned for the long term, with its dominant market position, strategic investments and favorable demographic trends. However, short-term growth may face challenges due to margin pressures, rising operating costs and tough comparisons to pandemic-driven demand. While SCI remains a solid player in the deathcare industry, investors should be mindful of potential headwinds as this Zacks Rank #3 (Hold) company navigates these hurdles.

SCI shares have rallied 12.6% in the past six months compared with the industry’s growth of 13.2%. 

Some Solid Staple Bets

We have highlighted three better-ranked stocks from the Consumer Staples sector, namely e.l.f. Beauty, Inc. ELF, United Natural Foods, Inc. UNFI and Freshpet FRPT.

e.l.f. Beauty, a cosmetic and skin care products company, currently sports a Zacks Rank #1 (Strong Buy). ELF delivered a trailing four-quarter earnings surprise of 45.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for e.l.f. Beauty’s current financial year sales and earnings indicates growth of 30.4% and 13.5%, respectively, from the year-ago reported number.

United Natural currently sports a Zacks Rank of 1. UNFI delivered a trailing four-quarter earnings surprise of 553.1%, on average. 

The consensus estimate for United Natural’s current financial-year sales and earnings suggests growth of 0.3% and 442.9%, respectively, from the year-ago period’s reported figure.

Freshpet, a pet food company, presently carries a Zacks Rank #2 (Buy). FRPT has a trailing four-quarter earnings surprise of 144.5%, on average.

The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings suggests growth of 27.2% and 228.6%, respectively, from the year-ago period’s reported figure.

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