Service Corporation International (SCI): Navigating Cremation Trends and Fixed-Cost Challenges to Fuel Sustainable Growth

The deathcare sector, long characterized by its high-fixed-cost structure and predictable demand, is undergoing a quiet revolution. Service Corporation International (SCI), the largest provider of funeral, cemetery, and cremation services in North America, has emerged as a case study in balancing traditional revenue streams with the disruptive forces reshaping consumer behavior. Its Q2 2025 earnings report—marked by a 11% year-over-year increase in adjusted EPS and $1.07 billion in revenue—offers a compelling lens through which to assess SCI's ability to sustain growth in an industry grappling with cremation trends, demographic shifts, and economic uncertainty.

Q2 2025 Earnings: A Glimpse of Resilience

SCI's Q2 results underscored its operational resilience. Earnings per share (EPS) of $0.88 outperformed estimates by 3.53%, while revenue surpassed forecasts by 1.9%. The stock's 2.75% post-announcement rally to $75.63 signaled market confidence, even as the P/E ratio of 21.2 suggests the stock is currently overvalued relative to its fair value.

The company's adjusted operating cash flow of $168 million in the quarter, coupled with $194 million in share repurchases and $45 million in dividends, highlights its disciplined capital allocation. SCI's liquidity position of $1.4 billion—including $250 million in cash and $1.2 billion in credit facility availability—provides flexibility to navigate macroeconomic headwinds. However, a net debt-to-EBITDA ratio of 3.68x, while within its target range of 3.5–4x, raises questions about its capacity to fund expansion amid rising interest rates.

Adapting to Cremation and Preneed Dynamics

SCI's ability to adapt to shifting consumer preferences is central to its long-term viability. The cremation rate in the U.S. now exceeds 65%, a figure that continues to rise due to cost-conscious consumers and environmental awareness. SCI has responded by investing in cremation facilities and digital memorial platforms, which align with the growing demand for personalized, low-cost services. During the Q2 earnings call, CFO Eric emphasized the cemetery segment's “resilience,” noting that consumers remain willing to invest in memorialization despite economic pressures.

Preneed sales—where customers prepay for funeral or cemetery services—remain a cornerstone of SCI's strategy. The company reported low to mid-single-digit growth in preneed sales for both segments, a modest but critical driver of future revenue. Preneed cemetery sales, in particular, offer a stable cash flow stream, with SCI projecting 2–3% revenue growth in 2025. However, the company faces challenges in converting these preneed contracts into recognized revenue, as inflation and interest rate volatility complicate long-term financial planning.

Fixed-Cost Challenges and Strategic Levers

SCI's business model is inherently capital-intensive, with significant investments in real estate, facilities, and insurance reserves. Its $100 million in Q2 capital expenditures—directed toward cemetery development and funeral home acquisitions—reflects a long-term commitment to asset management. Yet, rising costs for land and maintenance in the cemetery segment threaten gross margins. SCI's solution? Operational efficiency gains and technology-driven cost controls, such as AI-powered pricing tools and automated service workflows.

The company's debt load, while manageable, remains a double-edged sword. With interest rates at multi-decade highs, SCI's leverage could become a drag on profitability if cash flow growth slows. However, its $880–$940 million adjusted operating cash flow guidance for 2025 suggests confidence in its ability to service debt while funding growth initiatives.

Investment Implications: Balancing Risks and Rewards

SCI's Q2 performance demonstrates its capacity to thrive in a sector often perceived as recession-proof. Yet, investors must weigh several critical factors:
1. Cremation Normalization: As cremation becomes the dominant choice, SCI's traditional funeral services face margin compression. The company's pivot to cremation-centric services and memorial platforms is a mitigant, but execution risks remain.
2. Preneed Sales Momentum: Sustaining preneed growth in a low-interest-rate environment is easier than in today's climate. SCI's ability to attract customers with competitive financing options will be pivotal.
3. Debt Management: A net debt-to-EBITDA ratio of 3.68x is within acceptable limits, but further rate hikes could strain liquidity. SCI's $1.4 billion liquidity buffer provides a buffer, but aggressive deleveraging may be necessary to maintain credit ratings.

Conclusion: A Conservative Play in a Stable Sector

SCI's Q2 results affirm its status as a well-run operator in a sector with structural tailwinds. The aging U.S. population, with over 10,000 baby boomers turning 65 daily, ensures a baseline of demand. However, the company's long-term success hinges on its ability to innovate in the face of cremation trends and economic uncertainty.

For investors seeking defensive exposure to a stable industry, SCI offers a compelling combination of consistent cash flow and a 1.66% dividend yield. Yet, the overvalued P/E ratio and debt dynamics suggest a cautious approach. A strategic entry point—such as a pullback triggered by interest rate anxiety—could position investors to capitalize on SCI's durable business model while mitigating valuation risks.

In the end, SCI's story is one of adaptation: a traditional business reinventing itself to meet the needs of a modern, cost-conscious, and digitally savvy consumer base. Whether it can maintain this momentum will determine its place in the deathcare sector's next chapter.