When it comes to the death care industry, the 800 pound gorilla in the room is undoubtedly International service company (New York Stock Exchange: SCI). Even though he operates in an industry that many might consider boring and perhaps even morbidly, the company has shown tremendous stability in recent months. While the broader market is down this year, shares of this company have risen quite well. This speaks to the quality of the operation and it is likely that its stability will persist in the future. That said, the company’s shares now look more expensive than they used to. Even so, investors looking for a quality company at a fair price might consider participating in this prospect.
Stable returns during volatile times
In January of this year, I wrote an article that looked favorably on Service Corporation International. In that article, I said that the company continued to benefit from the high death rates that were occurring in the United States as a result of the COVID-19 pandemic. I said the company’s shares were attractively priced, but it was unclear how long the high deaths would persist. In the end, I ended up pricing the company as a “buy”, indicating my belief that it would outperform the market for the foreseeable future. Since then, my view has proven to be correct. While the S&P 500 is down 17.3%, shares of Service Corporation International have returned investors 4.7%.
This disparity in yields was not without cause. To begin, let’s see how the company fared in its Financial year 2021 compared to 2020. Revenue in 2021 was $4.14 billion. This translated to an 18% year-over-year increase, up from $3.51 billion generated in 2020. On the funeral side, the company saw revenue increase by 14, 2%, largely due to a 13.5% increase from a 4.4% increase in funeral services rendered due to COVID-19 related deaths, as well as an increase of 7 .1% of average revenue per funeral service After a year in which social distancing had a negative impact on sales. The company also benefited to the tune of $21 million from the properties acquired and newly built as part of this transaction. In the cemeteries category, meanwhile, revenue jumped 23.4% on a 24.2% increase and recognized pre-need income due to comparable strong production from property sales of pre-need cemetery for this period, as well as due to a 23.5% increase raising an incomparable cemetery to need income due to both higher selling prices and other miscellaneous factors. Higher revenue from the Endowment Care Trust Fund also contributed $18.1 million to this unit’s revenue.
In the end, things were just as positive. Net income of $802.9 million eclipsed the $516.1 million generated in 2020. Cash flow from operations fell from $804.4 million in 2020 to $920.6 million last year. last year. Meanwhile, EBITDA fell from $1.11 billion to $1.46 billion. When you consider the nature of the business, which is highly dependent on significant investment in assets, and factor in the increased demand caused by COVID-19, it makes sense that profitability could increase that much if not much time. This encouraged the company to recently increase its $394 million share buyback program up to a total of $600 million. This announcement was made in May of this year.
As far as the current financial year is concerned, the picture is a little more mixed. Revenue increased by 3.2% from $1.08 billion in the first quarter of 2021 to $1.11 billion the around the same time this year. In contrast, net profit deteriorated from $228.9 million to $219.5 million. While it may be painful, cash flow from operations fell from $297.6 million to $332.2 million. But that was unfortunately overshadowed by the fact that EBITDA also fell year over year, from $419.6 million to $412.9 million. With respect to the 2022 financial year as a whole, management provided some tips. They currently expect earnings per share to be between $2.80 and $3.20. This would imply a net income of $555.6 million. Clearly higher costs will hit the business later this year. This should also be reflected in operating cash flow, which management expects, at the midpoint, to be just $775 million for the year. If we apply the same year-over-year decline to EBITDA, then EBITDA should be around $1.23 billion for the year.
Taking these numbers, we can see that the company is trading at a forward price/earnings multiple of 19.9. This is up from the reading of 13.8 that we get using our 2021 results. The price to adjusted operating cash flow multiple should be 14.3 from the 12 that we we get from 2021. And the EV to EBITDA multiple should be around 12. This compares to the 10.1 we get if we rely on the 2021 results. These multiples are also compared to the numbers priors of 2021 that I calculated for the company in my last article, these figures being 16.4, 13.1 and 12.3 respectively. To put the price of the company into perspective, I decided to compare it to four similar companies. On a price/earnings basis, these companies ranged from a low of 15.2 to a high of 456. Two of the four that had positive results were below our outlook. Using the price/operating cash flow approach, the range was from 6.1 to 60.5, with three of the five companies being cheaper than our target. And when it comes to the EV/EBITDA approach, the range was from 7.5 to 12.6, with three of the four companies having positive results and our outlook being the most expensive of them.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|International service company||23.2||15.8||13.3|
|Transportation Services (CSV)||19.2||10.0||12.6|
|Matthews International Corporation (MATW)||456.0||6.1||11.8|
|Stone Mor (STON)||N / A||60.5||N / A|
Based on the data provided, it seems to me that Service Corporation International is still a pretty healthy company. Sales continue to grow, but it looks like profitability will be an issue this year. But that doesn’t change the fact that it’s a quality operator that’s set up for long-term success. Ultimately, I don’t think the company would be a bad prospect for long-term investors, which led to my decision to retain my “buy” rating on the company.