Oppenheimer Likes SCI Even More

Service Corporation International (NYSE: SCI) is one of those companies that everyone needs, but everyone is not happy about needing them. This is the world’s largest death care business, for cemeteries, funeral homes and all the products and services associated with the end of your life. Now Oppenheimer wants to say that it likes SCI even more.

Oppenheimer first initiated coverage on Service Corp. in the first half of November. Their take is that SCI’s compelling story continues to look very solid after recently attending investor meetings with the company’s chief financial officer.

The brokerage firm reiterated its Outperform rating and its $31 price target. Friday’s report said:

We’re drawn to the company’s leadership/strategic positioning within the $19 billion death care industry, which possesses favorable demographic tailwinds as the oldest baby boomers are now reaching an age when Service Corp.’s services become relevant. Furthermore, with a sizable sales force unrivaled by peers, Service Corp. is effectively pursuing “preneed” sales, which essentially secure investable income years in advance of the time of need, fueling its financial backlog. Combined with its strong free cash flow, balance sheet, and active return of capital strategy, we appreciate its investment profile.

Investors finally may be starting that secular trend for death care. Again, the oldest portion of the baby boomers, generally deemed those born from 1946 to 1960 or 1964 or so, are finally reaching the times in their lives where death is likely coming sooner rather than later.

Oppenheimer believes that SCI’s revenue profile is relatively predictable. It has both size and economies of scale and breadth of offerings opportunities unavailable to its competition. This should position SCI to benefit over the coming couple decades from baby boomers reaching an advanced age.

SCI also has about 4,000 sales staff pursuing “pre-need” sales, which will pull forward some of those revenues that would be generated later. Oppenheimer also sees SCI as having the ability to make many more accretive tuck-in acquisitions. SCI also pays a dividend with a yield of about 1.8%, which it has been increasing every two to three quarters, while it also has been actively repurchasing shares.

Oppenheimer’s $31.00 price target represents 17.3 times the firm’s price to free cash flow. The firm’s base case scenario in 2015, 2016 and 2017 adjusted EPS are $1.18 (+7%), $1.30 (+10%) and $1.45 (+12%), respectively. Its base case for revenue growth is mid-single-digit constant currency revenue growth and gradual margin expansion.
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SCI shares were last seen up only four cents at $27.39, with a consensus analyst price target of $33.75 and a 52-week trading range of $21.53 to $32.02.