Over the past six months, Service International’s stock price fell to $76.65. Shareholders have lost 7.2% of their capital, which is disappointing considering the S&P 500 has climbed by 16.8%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Service International, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Service International Will Underperform?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons why there are better opportunities than SCI, plus one stock we’d rather own.
1. Inability to Grow Funeral Services Performed Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Service International, our preferred volume metric is funeral services performed). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Over the last two years, Service International failed to grow its funeral services performed, which came in at 87,347 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Service International might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Service International has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 14.7%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Service International’s ROIC averaged 1.9 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Service International falls short of our quality standards. Following the recent decline, the stock trades at 17.4× forward P/E (or $76.65 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Like More Than Service International
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