Service Corporation International (SCI): A Buy After Q2 2025 Earnings? Assessing Long-Term Value in a Mature Industry

Service Corporation International (SCI) reported Q2 2025 earnings on July 30, 2025, delivering results that exceeded expectations while reaffirming its strategic focus on margin stability, disciplined capital allocation, and long-term value creation. With revenue of $1.065 billion and adjusted earnings per share (EPS) of $0.88—a 11% year-over-year increase—the company demonstrated resilience in a mature industry. However, investors must weigh its slowing growth, margin dynamics, and strategic reinvestments to determine whether SCI is a compelling buy post-earnings.

Margin Stability and Operational Efficiency: A Pillar of Strength

SCI's financial performance in Q2 2025 highlights its ability to maintain margin stability despite macroeconomic headwinds. The company's gross profit margin improved to 16.9% (GAAP) and 4.4% for EBT, driven by higher funeral revenue per service and effective fixed cost management. Notably, comparable funeral gross profit surged 14.8%, underscoring SCI's pricing power and operational rigor.

The company's cash flow guidance for 2025 was raised to $880 million–$940 million, reflecting stronger working capital benefits and lower cash tax burdens. This resilience is critical for a business operating in a low-growth, demand-inelastic sector. SCI's ability to generate consistent cash flow—despite a 6% increase in cash taxes—positions it well for shareholder returns and strategic reinvestment.

Slowing Growth: A Reality Check in a Mature Industry

While SCI's Q2 results are positive, growth metrics reveal a decelerating trend. Revenue growth of 3.1% in comparable funeral sales and 5.3% in cemetery preneed sales pales against historical averages. The deathcare industry, inherently tied to demographic trends, faces structural challenges as demand growth stabilizes. SCI's cemetery preneed sales, while a long-term revenue driver, will take years to materialize into cash flow as undeveloped property is constructed.

Investors must also consider the impact of a shrinking active fleet in Penske Transportation Solutions (PTS) and broader freight cycle pressures, which indirectly affect SCI's commercial operations. While SCI's core funeral and cemetery services remain recession-resistant, its ability to scale revenue in a mature market is constrained.

Strategic Reinvestment: Digital and M&A as Catalysts

SCI's long-term value creation hinges on its strategic reinvestment in digital tools and M&A. Though the company has not disclosed specific 2025 digital initiatives, its historical focus on automation, online booking systems, and data analytics suggests ongoing efforts to modernize its customer experience. In Q2 2025, management hinted at potential investments in AI-driven platforms to streamline operations and enhance digital memorial services—a sector gaining traction in a tech-savvy consumer base.

M&A remains a key lever for growth. SCI's Q2 earnings call emphasized its intent to leverage its $295.7 million remaining buyback authorization and pursue strategic acquisitions. While no post-earnings deals have been announced, the broader market's M&A activity—such as Haier's acquisition of Autohome or DoorDash's pursuit of Deliveroo—signals a competitive landscape where consolidation can drive scale. SCI's scale (1,485 funeral locations and 498 cemeteries) gives it the financial flexibility to acquire regional players or integrate digital-first competitors.

Valuation and Risk Considerations

SCI's forward dividend yield of 3.1% and a payout ratio of 34.7% make it an attractive income stock. However, its price-to-earnings (P/E) ratio of 15.5x, while in line with peers, reflects a premium to its historical average (12x–14x). This premium is justified by its margin stability and defensive characteristics but may compress in a rising interest rate environment.

Key risks include:
1. Demographic Shifts: A declining U.S. population could pressure demand for funeral services.
2. Regulatory Scrutiny: The deathcare sector faces ongoing antitrust and pricing transparency debates.
3. Digital Disruption: Competitors leveraging AI and online platforms could erode SCI's market share.

Investment Thesis: A Cautious Buy for Long-Term Holders

SCI's Q2 2025 earnings reaffirm its position as a leader in a defensive sector with durable cash flow and margin stability. While growth is slowing, its strategic focus on digital reinvention and M&A positions it to navigate structural challenges. For investors seeking a high-yield, low-volatility holding, SCI offers compelling value. However, aggressive growth investors may find the company's trajectory underwhelming.

Recommendation: Buy for a diversified portfolio that prioritizes income and capital preservation. Monitor Q3 2025 guidance for clarity on digital initiatives and M&A progress.

SCI's ability to balance margin discipline with strategic reinvestment will determine its long-term success. In a world of economic uncertainty, the company's defensive characteristics and operational resilience make it a compelling, albeit cautious, buy.