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Service Corp. (SCI) Down 7.1% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Service Corp. (SCI). Shares have lost about 7.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Service Corp. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Service Corporation Q4 Earnings Miss Estimates, Up Y/Y

Service Corporation released fourth-quarter 2018 results, with the top and the bottom line missing the Zacks Consensus Estimate. Nevertheless, revenues and earnings improved year over year. The quarterly results gained from strong performance in the cemetery category.

Q4 in Details

Adjusted earnings increased 8% year over year to 54 cents per share, though it came below the Zacks Consensus Estimate of 56 cents. The year-over-year upside was backed by solid cemetery profit, gains from newly acquired businesses and favorable impacts from tax reform and planning. These upsides were partly offset by lower profit in the funeral segment.

Adjusted effective tax rate was 20.5% in the fourth quarter of 2018 compared with 28.2% in the same period last year, owing to reduced state taxes.

Total revenues of $820.8 million, inched-up nearly 1% from $812.7 million in the year-ago quarter. Improved cemetery revenues aided the top line. However, the figure came below the consensus mark of $846.8 million.

General and administrative costs increased nearly $7.1 million to reach $38.5 million, owing to higher legal settlement costs, general liability and worker compensation claims.

The company’s interest costs rose $3.4 million to $47 million, due to higher interest rates on the company’s floating rate debt and increased total debt.

Segment Discussion

Comparable Funeral revenues declined 2.8% owing to lower core and recognized preened revenues. Core revenues declined as a result of lower funeral services performed and reduced average revenue per service conducted. Moreover, revenues in this category were dented by the absence of flu season. Recognized preneed revenues declined on fewer contracts sold. These downsides were partly compensated by higher non-funeral home revenues. Comparable preneed funeral sales production declined 2.1%. This was due to lower non-funeral home sales, stemming from temporary disruption caused by restructuring of sales associates.   

Comparable funeral operating profit declined 7.8% to $90.6 million and the operating margin contracted nearly 100 basis points (bps) to 20.1%. The downside resulted from lower revenues, higher wages and increased medical claims. These were partially offset by lower selling expenses.

Comparable Cemetery revenues rose 3.6% year over year, courtesy of higher recognized preneed revenues, partially offset by decline in other revenues. Comparable preneed cemetery sales production grew 11.8% on account of higher preneed property production.

Comparable cemetery operating profit rose nearly 2.8% to $118.4 million, while the respective margin contracted 30 bps to 33.8%. Higher revenues in the unit were more than offset by increased fixed costs stemming from wages and medical claims.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $198.9 million, long-term debt of $3,532.2 million and total equity of approximately $1,641.8 million.

Net cash from operating activities (excluding special items) amounted to $163.5 million in the quarter compared with $125.4 million in the prior-year period. The improvement was triggered by lower cash taxes.

During the fourth quarter, Service Corporation returned $32.7 million to shareholders via dividends and share buybacks, while it returned $401.5 million during 2018.

Also, the company incurred capital expenditures of $17.9 million and $226.9 million during the fourth quarter and 2018, respectively. These expenditures were mainly incurred for accretive acquisitions and building new funeral homes.

Outlook

Management expects the company to be well positioned for long-term growth, backed by dedicated workforce, solid operating platform and a healthy financial position. The company plans to continue deploying capital efficiently to augment shareholders’ value.

That said, adjusted earnings per share for 2019 is envisioned to be $1.84-$2.02. Further, management expects net cash from operating activities (excluding special items) between $550 million and $610 million. The company plans to allocate about $195 million toward capital enhancements at existing facilities and cemetery development.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -14.58% due to these changes.

VGM Scores

At this time, Service Corp. has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Service Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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