Iridian and Service Corporation International
Iridian slightly increased its position in Service Corporation International/US (SCI). The fund’s 13G filing in January revealed that it holds 10,484,630 shares of the company, which is a minor increase over its earlier position of 10,478,010 shares. The 13G filing also disclosed that the fund holds a 5% passive stake in the company.
Service Corporation International: A company overview
Service Corporation International/US (SCI) provides death care services and products. The company has a broad network of cemeteries and funeral service locations and operates primarily in the United States and Canada. The operations of the company consist of crematoria, funeral services, cemeteries, and funeral service locations.
The primary services of Service Corporation International/US include cremation, burial, and embalming. The company also tends to sell conventional funeral necessities such as burial garments, flowers, cremation receptacles, burial values, caskets, and prearranged funeral services.
The company has significantly expanded in the last couple of years through acquisitions. It’s pursuing the market for cremation services in an aggressive manner.
Service Corporation International experiences increased market share and synergies from Stewart acquisition
In 2013, Service Corporation International/US acquired Stewart Enterprises, Inc., its largest competitor, for $1.4 billion. This acquisition made the company the largest provider of death-care services.
Since the acquisition, Service Corporation International/US paid down $230 million over a period of 12 months. Debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) is expected to fall during 2015, after which the company can accelerate its repurchase of shares.
The company reportedly has sufficient free cash flows to finance further acquisitions and grow its share within the fractured industry.
What will ensure the company’s competitive advantage?
Service Corporation International/US (SCI) is a major player in the North American stable cemetery and funeral industry. The company has a 16% share of the revenues in the industry. Its scale offers enormous cost efficiencies and purchasing power.
The scale of the firm’s operations offers an opportunity for the company to experience differential growth through preneed sales. Baby Boomers, who are presently benefiting from preneed results, should provide a tailwind for propelling future growth.
The preneed sales for funeral and cemetery services rendered by the company have experienced robust growth due to enhanced productivity and favorable demographics.
Strong, consistent financial performance
Service Corporation International/US (SCI) has been experiencing a robust growth in free cash flow, amounting to a CAGR (compound annual growth rate) of 17%. Normalized earnings per share for 3Q14 was $0.23, which represents a 28% growth compared to the previous year.
Adjusted operating cash flow grew by 21% to $123.2 million. The company’s strong track record pertaining to double-digit growth in earnings is expected to continue during 2015.
After funding dividend payments, the company has significant levels of free cash flows available for pursuing strategic options such as share repurchases and acquisitions.
In addition to stable cash flow, the company has maintained consistent and substantial liquidity with a target minimum liquidity level of $300 million. The favorable maturity profiles for the company’s debt give it a large amount of financial flexibility.
Iridian’s 13G positions
According to its 13G filing, Iridian Asset Mnagement didn’t initiate any new positions.
The fund increased its holdings in the following companies:
- Myriad Genetics, Inc. (MYGN)
- Service Corporation International/US (SCI)
- Avis Budget Group, Inc. (CAR)
- Omnicare, Inc. (OCR)
- Halozyme Therapeutics Inc. (HALO)
- Theravance Inc. (THRX)
- AOL Inc. (AOL)
- Lexmark International, Inc. (LXK)
- The Valspar Corporation (VAL)
- W.R. Grace and Company (GRA)
- Sealed Air Corp. (SEE)
- Pitney Bowes Inc. (PBI)
- Graphic Packaging Holding Company (GPK)
- SemGroup Corporation (SEMG)
A significant aspect of the fund’s 13G filings is that Iridian Asset Management dropped the following two key positions:
In the next part of this series, we’ll look at Iridian Asset Management’s position change in Avis Budget Group, Inc. (CAR).