Executive Summary / Key Takeaways

• Service Corporation International is North America's largest deathcare provider, leveraging its extensive network and strategic focus on preneed sales to build a robust $15.9 billion backlog, providing stability and future revenue predictability.
• Recent financial performance in Q1 2025 showed impressive funeral segment growth driven by core strength and higher general agency commissions from a new insurance agreement, offsetting a slight dip in cemetery revenue impacted by lower large sales production.
• The ongoing transition of SCI Direct and core preneed funeral sales to a new insurance provider is causing temporary production slowdowns but is expected to significantly enhance future average revenue per service and general agency profitability.
• Management forecasts a return to EPS growth towards the higher end of the historical 8-12% range in 2025, supported by strategic initiatives, acquisition contributions, and stabilizing funeral volumes, despite a headwind from normalizing cash taxes.
• SCI maintains a strong balance sheet and robust cash flow generation, enabling continued investment in high-return acquisitions and cemetery development while consistently returning capital to shareholders through dividends and share repurchases.

Setting the Scene: A Foundation Built on Scale and Service

Service Corporation International stands as the undisputed leader in the North American deathcare industry, operating an expansive network of 1,489 funeral service locations and 496 cemeteries across 44 U.S. states, eight Canadian provinces, the District of Columbia, and Puerto Rico as of March 31, 2025. This unequaled geographic scale and reach form the bedrock of its business model, which serves a wide array of customer needs through funeral homes, cemeteries, and combination locations. The company's core strategy revolves around providing compassionate, professional services at the time of need while also emphasizing preneed sales – the arrangement and purchase of services and merchandise prior to death.

The industry itself is fundamentally shaped by demographic trends. Population growth and the average age directly influence death rates and the overall number of deaths. As the large baby boomer generation approaches older age, with the first cohort turning 80 next year, the long-term outlook for deathcare services is underpinned by a clear demographic tailwind, expected to contribute incrementally to volume over the coming years. Another significant trend is the continuing increase in the cremation rate across North America. While this trend can pressure average revenue per service compared to traditional burials, SCI actively responds by developing and promoting complementary services and merchandise specifically appealing to cremation customers, aiming to enhance revenue opportunities within this growing segment. The pace of the cremation mix shift appears to be moderating, with recent increases below historical averages, suggesting it may become a less significant headwind over time.

Within this landscape, SCI operates in a fragmented market, where its scale provides a significant competitive advantage. Compared to smaller rivals like Carriage Services (CSV) or cemetery-focused StoneMor (STON), SCI's extensive network allows for greater operational efficiency and economies of scale, potentially leading to lower per-unit operating costs. The integrated funeral and cemetery model, particularly in combination locations, enables cross-selling opportunities and a more comprehensive offering than product-focused players like Matthews International (MATW). SCI's strategy of establishing and maintaining leading market share positions is supported by its strong local heritage and relationships built over decades, further solidifying its competitive moat against both national and regional competitors.

A cornerstone of SCI's strategy and a key differentiator is its robust preneed program. By selling cemetery property and funeral/cemetery merchandise and services in advance, SCI not only secures future business but also builds a substantial backlog of deferred revenue. This backlog, totaling $15.9 billion as of March 31, 2025, provides a significant degree of stability and predictability to future revenue and cash flows, distinguishing SCI from businesses solely reliant on at-need services. The company's capital allocation strategy prioritizes investing in this network through strategic acquisitions and new builds, returning excess cash to shareholders through consistent dividends and share repurchases, and maintaining a prudent debt structure.

Leveraging Technology for Enhanced Operations and Customer Experience

Technology plays an increasingly vital role in SCI's operations and its ability to serve families effectively, contributing to its competitive positioning. While not centered around a single, revolutionary hardware technology like some industries, SCI's technological differentiation lies in its strategic application of digital tools and data analytics across its business processes and customer interactions.

Customer-facing technology, such as online planning tools and digital memorialization platforms (e.g., online and video tributes), is designed to improve the customer experience, reduce administrative burdens during a difficult time, and allow families to visualize enhanced product and service offerings. Management believes these tools can help drive increases in the average revenue for services, particularly for cremations, by making complementary memorialization options more accessible and appealing.

Behind the scenes, SCI utilizes technology to enhance operational efficiency and sales productivity. Investments in digital systems and initiatives, including sophisticated CRM systems and data mining capabilities, support the sales force by improving lead generation, tracking, and conversion. This allows the company to work leads more effectively, potentially reducing customer acquisition costs and improving sales counselor retention by making them more successful. The ability to identify potential customers through data analytics from sources outside traditional at-need interactions is becoming increasingly important as a lead source for preneed cemetery sales, complementing leads generated from funeral volumes.

While specific, quantifiable metrics on the direct impact of every technological investment were not provided, the strategic intent is clear: to leverage technology to drive sales productivity, enhance operational efficiency, improve the customer experience, and ultimately contribute to revenue growth and margin expansion. These efforts are part of the ongoing maintenance and growth capital expenditures, reflecting a commitment to utilizing digital tools to maintain and extend SCI's competitive advantages in the market.

Recent Performance: Strength in Funeral, Cemetery Timing

SCI's financial performance in the first quarter of 2025 demonstrated the underlying strength of its core business, particularly within the funeral segment. Consolidated net income attributable to common stockholders rose to $142.9 million ($0.98 per diluted share) in Q1 2025, up from $131.3 million ($0.89 per diluted share) in the prior year quarter. This growth was primarily fueled by impressive increases in funeral gross profit, which more than offset a slight decrease in cemetery gross profit. Favorable impacts below the line, including lower interest expense and a reduced share count from ongoing repurchases, also contributed positively, although these were partially negated by a higher effective tax rate in the quarter (26.1% vs 22.9% in Q1 2024), mainly due to the non-deductibility of certain excess tax benefits from stock option settlements.

The funeral segment saw total comparable revenue increase by approximately 4% in Q1 2025. This was driven by a 4% rise in comparable core funeral revenue, resulting from a healthy 2.5% growth in the core average revenue per service and a 1% increase in core funeral services performed. Notably, this average revenue growth occurred despite a modest 70 basis point increase in the cremation rate. Core general agency and other revenue also grew significantly, benefiting from higher average commission rates under the new preneed insurance marketing agreement and a shift towards selling a larger percentage of higher-commission underwritten insurance products. These gains more than offset a decline in SCI Direct non-funeral home preneed sales revenue, which was impacted by operational changes to defer merchandise deliveries and administrative challenges during the transition to insurance-funded contracts. Funeral gross profit increased by over 16%, with the comparable gross profit percentage expanding significantly to 24.3%, reflecting the strong revenue growth and effective fixed cost management. Preneed funeral sales production, however, decreased by 10% in Q1 2025, primarily due to the ongoing transitions in both the core and SCI Direct channels.

In the cemetery segment, comparable revenue decreased by about 2% in Q1 2025. This decline was mainly attributable to a decrease in recognized preneed property revenue, stemming from lower preneed property sales production. While recognized preneed merchandise and service revenue saw growth from higher-value contracts maturing from the backlog, this was insufficient to offset the property revenue decline. An increase in atneed revenue and internal care fund income provided a partial offset. Comparable preneed cemetery sales production declined by 3%, primarily due to a decrease in large sales, which management views as a timing issue, noting positive trends in April. Cemetery gross profit decreased by about 3.4%, with the comparable gross profit percentage slightly lower at 31.6%, reflecting the revenue decline partially mitigated by cost control.

Overall, Q1 2025 demonstrated the funeral segment's ability to drive growth through core execution and strategic shifts in preneed funding, while the cemetery segment experienced temporary headwinds related to sales timing and recognition.

Financial Strength and Strategic Capital Deployment

SCI's financial condition remains robust, characterized by ample liquidity and a manageable debt maturity profile. As of March 31, 2025, the company held approximately $1.6 billion in liquidity, comprising $230 million in cash and cash equivalents and $1.35 billion available under its Bank Credit Facility. This strong liquidity position, coupled with consistent operating cash flow generation, provides substantial flexibility for strategic investments and shareholder returns.

Net cash provided by operating activities was a strong $311.1 million in the first three months of 2025, a significant increase over the prior year period. This improvement was driven by favorable working capital dynamics, including higher cash receipts from customers and increased general agency commissions, alongside lower cash interest payments and decreased employee compensation payments.

The company's capital allocation strategy is clearly defined: prioritize investments in high-return acquisitions and new builds, return excess cash to shareholders, and manage debt prudently. SCI has been active on the acquisition front, investing $181 million in 2024, exceeding its typical annual target range of $75 million to $125 million. Management remains optimistic about the deal pipeline, particularly for high-quality businesses in major metropolitan areas and larger combination facilities, noting that higher interest rates have potentially reduced competition from rivals with more variable-rate debt. Acquisition multiples are typically around 8 to 10 times EBITDA pre-synergies, with SCI able to realize synergies quickly due to its scale. The company also continues to invest in growth capital, such as new funeral home construction and real estate for future development, targeting attractive low to mid-teen after-tax IRRs.

Shareholder returns are a consistent focus. SCI has a long history of growing its quarterly cash dividend, which reached $0.32 per share in 2025, and targets a payout ratio of 30% to 40% of after-tax earnings (excluding special items). The company also actively repurchases shares under its authorization, having bought back 1.64 million shares for $130.8 million in Q1 2025 alone, and continued repurchases subsequent to the quarter end.

Debt management is aimed at maintaining an optimal balance of liquidity and flexibility. SCI targets a leverage ratio of 3.5x to 4.0x net debt to EBITDA, and ended Q1 2025 within this range at 3.59x. The company opportunistically manages its debt maturity profile, as evidenced by the September 2024 issuance of an 8-year, $800 million note at 5.75% to repay higher-rate floating debt, which was immediately accretive and enhanced liquidity.

Outlook: Positioning for Growth Beyond Transition

Management has confirmed its normalized earnings per share guidance range of $3.70 to $4.00 for 2025, with a midpoint of $3.85. This midpoint represents a projected 9% year-over-year growth in EPS. Notably, neutralizing the impact of the higher effective tax rate expected in 2025 (25-26%), primarily due to changes in the deductibility of excess tax benefits from stock option settlements, would result in a tax-neutralized EPS growth of 12% at the midpoint, aligning with the higher end of the company's historical annual growth range.

The outlook for 2025 is predicated on overcoming temporary headwinds experienced in 2024 and capitalizing on strategic initiatives. Funeral volume is expected to be flat to slightly down compared to 2024, reflecting the continued, albeit diminishing, impact of the COVID pull-forward effect. Average revenue per case is anticipated to grow at inflationary rates, partially offset by the modest cremation mix increase. Healthy profit growth in the funeral segment is expected, with gross margins projected to increase by 80 to 120 basis points, driven significantly by higher general agency revenues from the new insurance marketing agreement. Pre-need funeral sales production is expected to be slightly lower in 2025 due to the ongoing SCI Direct transition and adaptation to new policies with the core insurance partner, but management anticipates a return to low to mid-single-digit growth in 2026 as these transitions stabilize.

In the cemetery segment, pre-need sales production is expected to grow in the low single-digit percentage range in 2025, contributing to anticipated cemetery revenue growth of 1% to 2%. While equity market volatility could impact trust income, continued focus on cost management is expected to maintain strong gross margin percentages in the 32% to 33% range.

From a cash flow perspective, 2025 adjusted operating cash flow is guided to a range of $830 million to $890 million, with a midpoint of $860 million. Adjusted operating free cash flow, after deducting expected maintenance capital of $315 million, is projected at almost $550 million. A significant factor impacting cash flow in 2025 will be the normalization of cash taxes, representing a headwind of approximately $150 million year-over-year as the benefit from a prior tax accounting method change is fully realized. This headwind is expected to be more pronounced starting in the second quarter of 2025. Despite this, cash flow before taxes is expected to remain strong, supported by anticipated earnings growth and robust pre-need cemetery installment receipts.

Overall, the 2025 outlook reflects a period of strategic execution and stabilization following recent operational transitions, positioning SCI to leverage its market leadership, expanding preneed backlog, and favorable demographic trends for sustained growth in the years ahead.

Risks and Considerations

While SCI's market position and strategic initiatives provide a strong foundation, several risks and challenges warrant investor attention. Fluctuations in funeral volumes, influenced by factors like the diminishing COVID pull-forward effect and changes in life expectancy, can impact at-need revenue. The ongoing trend towards cremation, while being addressed through complementary offerings, inherently results in lower average revenue per service compared to traditional burials. Volatility in cemetery large sales, although often a timing issue, can affect quarterly cemetery production and recognized revenue.

Operational transitions, such as the shift to a new preneed insurance provider and the conversion of SCI Direct contracts, can cause temporary disruptions in sales production and revenue recognition, requiring sales force training and adaptation. The company also faces ongoing labor pressure, particularly in certain operational roles, and is exposed to potential impacts from natural disasters and significant weather events on its facilities and operations.

Financial risks include potential volatility in equity markets affecting trust income, which is a component of revenue, and the impact of interest rates on floating rate debt and cash interest payments. While SCI has a favorable debt profile, its leverage ratio requires careful management. Furthermore, the company is subject to various legal proceedings, regulatory matters, and unclaimed property audits, particularly concerning preneed trust funds, which could result in material liabilities or changes in accounting for its backlog. Changes in taxation or the interpretation of tax laws could also impact financial results.

Management actively addresses these risks through cost control measures, adapting service offerings to changing consumer preferences, utilizing technology for lead generation and operational efficiency, maintaining insurance and self-insurance programs, and vigorously defending legal and regulatory matters. However, the realization of these risks could still impact financial performance and the achievement of stated guidance.

Conclusion

Service Corporation International's investment thesis is fundamentally rooted in its dominant market position, expansive operational network, and strategic emphasis on preneed sales, which together create a durable competitive advantage and a significant backlog of future revenue. The company's recent performance, particularly the strength in its funeral segment driven by core growth and the positive impact of its new preneed insurance agreement, underscores its operational effectiveness. While the cemetery segment and preneed funeral production are navigating temporary transitions and market dynamics, management's outlook for 2025 signals confidence in overcoming these near-term headwinds and returning to a trajectory of growth aligned with historical performance.

SCI's robust financial health, characterized by strong cash flow generation and a disciplined capital allocation strategy focused on high-return acquisitions, strategic investments in its infrastructure and technology, and consistent shareholder returns, further supports the investment case. As demographic trends continue to favor the deathcare industry with the aging of the population, SCI is well-positioned to capitalize on this long-term opportunity, leveraging its scale, brand, and evolving preneed strategy to drive future profitability and create value for shareholders, provided it effectively manages operational challenges and regulatory risks.