Tuesday, April 27, 1999
Service Corporation International
Price (4/26/99): $19 1/16
HOW DID IT FIND TROUBLE?
Has deathcare gone obit city? Funeral operator Service Corporation International has been on the receiving end of this fiscal burial. After a year in which margins and expectations have gone under, shareholders have been reluctant to attend the wake.
Business has been, for lack of a better word, dead. Earnings growth was flat last year and is expected to continue to flatline this year. This was not what investors were hoping to unearth when they first bought into the company. In a fragmented industry, dominated by smaller family-owned chains, a consolidator like Service Corp. was supposed to be able to buy out the fledgling competition at bargain prices and grow the company in the process. But few get to write their own obituary and Service Corp.'s has certainly not gone as planned.
Everything from low mortality rates to a surge in the popularity of the cheaper cremation over standard burial services have hurt the top and bottom lines at Service Corp. Resilient competition from smaller operators with no intention of cashing out has also kept the company's pricing flexibility in check.
Service Corp. started out with a single funeral parlor in Houston, Texas. Today it operates more than 3,442 funeral service locations, 433 cemeteries and 191 crematoria. Service Corp. provides funeral and cemetery services in 20 countries with 35,000 employees.
Beyond its funeral services, the company also provides customer financing through its Provident financial services division. That subsidiary also includes last year's acquisition of American Memorial Life Insurance as well as insurance operations in France.
12-month sales: $2,875.1 million
12-month income: $342.1 million
12-month EPS: $1.31
Profit Margin: 11.9%
Market Cap: $5003.9 million
Cash: $358.2 million
Current Assets: $1,209.1 million
Current Liabilities: $630.3 million
Long-term Debt: $3,764.6 million
HOW COULD YOU HAVE SEEN IT COMING?
People are living longer. Medical breakthroughs and sounder mind and bodies through leisure and exercise have increased our life expectancies. Service Corp. services 11% of all North American funeral services. However, it seems that it will be getting more of us later rather than sooner.
Another trend is the popularity of cremation, which is a less expensive alternative to traditional burial rites.
All of this has been building up for quite some time but investors shook off the reality of the sector because Service Corp. was growing through acquisitions both here and abroad. However, the overseas market was not something worth waiting for. In Europe, standard funeral services markups are meager compared to the Stateside transactions. Last year gross margins in the funeral services division (which makes up the majority of Service Corp.'s take) ran 28.2% in North America while the company managed only an 11.6% showing in Europe.
Gross margins actually fell in all three of Service Corp.'s divisions (funerals, cemetery and financial services) last year. The sector had lost its pulse and was apparent to anyone willing to take the reading.
WHERE TO FROM HERE?
Service Corp. is not dead yet. Last month both JP Morgan and Merrill Lynch upgraded the suddenly lively company. The company announced a corporate and debt restructuring that will amount to $60 million in pretax annualized savings at the expense of a one-time $105 million hit. That's not a shabby return if the numbers pan out as the company expects.
Shareholders may be skeptical and they have good reason to be. The company didn't announce that earnings would fall substantially in the December quarter until January was coming to a close. Maybe Service Corp. was used to clients who couldn't complain over services rendered but the living shareholders have now filed class action lawsuits over the company's foot-dragging in reporting the shortfall. While Service Corp. might very well prevail, it is no easy task to provide timely accounting when you are a network of so many acquired parlors, and it could be a cloud over the company until the suits are finally settled or dismissed.
In the meantime, if the cost savings prevail, a much leaner Service Corp. will serve its shareholders well. While the $60 million in annualized savings is only good for a $0.15 a share improvement after taxes, it is a sign that the company is tackling its growing pains aggressively. Despite a heavy debtload of $3.8 billion, it is actually in better fiscal shape than competitors like the fading Loewen Group (NYSE: LWN).
So, deep inside this coffin there is some ticking going on. Let's just hope it's a heart.
-Rick Aristotle Munarriz (TMFEdible@aol.com)
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