Jehoshaphat Research Is Short Service Corporation International (SCI)

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Jehoshaphat Research believes Service Corporation International (NYSE:SCI)’s prices for funeral services are far higher than those of its peers. As online price transparency becomes ubiquitous in the US, this high-fixed-cost, heavily leveraged business stands to suffer a ~30% decline in funeral pricing.

The playbook for this already exists: online price transparency crushed SCI’s former affiliates in the UK and Australia. We see SCI’s EPS going negative in 18 months or sooner. Surprisingly enough, multi-year periods of net losses are not uncommon for this “safe” business. We are short SCI.

Service Corporation International Is Not A Sleep-Well-At-Night Stock

Investors who own SCI think of it as a safe stock, with its dividend, low short interest and low volatility placing it firmly into the category of “defensive” companies. Thinking of SCI as a “sleep-well-at-night” stock while not monitoring it closely has gotten past generations of investors into trouble, but today it’s an unusually dangerous mistake.

The emergence of online price transparency in Australia and the UK has upended high-priced funeral home chains in these countries. Their funeral consumers have embraced the internet for easy price comparisons, finally discovering who the rip-offs are.

“We started to cut prices. And you know that history of the company was trying to find a price level to stabilize the loss of [market] share. This whole effect has been accelerated by the Internet and increased transparency.”

– June 2021 Dignity Plc (UK) AGM call

“The prices of larger [higher-priced] funeral brands, with five or more locations, have come down…”

Sydney Morning Herald article describing effects of price transparency rules in New South Wales, Australia

Which brings us to SCI, whose astronomical prices have been criticized by US funeral industry bloggers and consumer watchdogs for decades.

“[A consumer watchdog] survey found that median prices for basic funeral services are as much as 72% higher at SCI funeral homes…than at independent rivals.”

CBS News article

SCI has gotten away with much higher prices because funeral consumers in the US have not had the same opportunity as their foreign counterparts to enjoy the internet’s price-discovery blessings, and because price-shopping funerals is extremely difficult without an online option. And few companies have fought harder against online price transparency than SCI.

“Most of the 33 funeral homes survey[ed] that are affiliated with [SCI] refused to disclose prices online then largely ignored consumer requests for these prices.”

– Consumer Federation of America

“Requiring prices to be posted online…could lead consumers to believe that funerals are commodities that can be comparison shopped online.”

– SCI comment letter to FTC

But while nothing is as certain as death, the inevitability of the internet’s flattening and democratizing pricing in any B2C business might be a close second. For SCI, its time has come. After many years of low penetration rates for online funeral pricing, 2023 has brought a step-function increase in US funeral companies posting their prices online.

“We’re getting a lot of phone calls saying ‘Brand X funeral company has their prices online, why can’t I see yours?’ So in the next 30 days or so, we’re going to put our pricing online and…call out specific competitors’ prices against our prices.”

– C-level executive at US funeral chain

“But now it’s moving towards where, Hey, I’ve got to advertise [prices], now I want to beat my competitor to putting prices online because that shows I’m transparent.”

– Texas funeral director

Hidden Prices

We can think of no better way to get a funeral director to post his prices online than for a bunch of his competitors to do it. (Short of the government forcing him to do it which, by the way, is also happening soon.) And while SCI claims to be moving toward compliance with the rapidly developing new normal, an independent third party’s analysis finds that most SCI websites are still either using “hidden” pricing or not providing their price lists at all.

We expect that this online price transparency revolution will do the same thing to SCI that it has done to large funeral companies in other Western countries: Pricing will fall by double digits. Fixed costs will stay fixed. The dividend will be eliminated, the stock will crash, profitability and valuation will reset lower, and equity investors will rediscover their subordination to creditors in a heavily leveraged company.

Even worse, we expect this morbid outcome to be exacerbated by well-below-normal deaths over the next couple of years, just like what followed the massive “pull-forward” in mortality during the Spanish Flu.

In 1998, with SCI’s business firing on all cylinders and its stock price cruising, it would have seemed inconceivable that this “safe” company would ever eliminate its dividend. In 1999, amidst total financial chaos, SCI eliminated its dividend. The funeral business is boring…until it isn’t.

In conducting our research, we spoke with over three dozen foreign and American funeral home operators, industry experts/consultants, and former SCI employees. We also compared domestic and foreign funeral industries, assessed market strategies of the leading players, reviewed SCI’s financial performance under various historical mortality and other conditions, and analyzed the nuances of price transparency rules from country to country. If you have questions about our research process, write to us: [email protected]. Please note, we will not identify any sources not already identified in this report.

“How did the funeral company make so much money? They had the market coronered.”

– Unknown Genius