Service Corporation (NYSE:SCI), the largest funeral home operator in the United States, made news last week with its large acquisition of Stewart Enterprises (NASDAQ:STEI). The acquisition was well received by investors, as shares rose 8% on the day of the announcement. Together, the two companies will see huge cost savings advantages and a backlog that is currently undervalued.
Service Corporation is shelling out $1.4 billion to acquire Stewart Enterprises for $13.25 a share. The deal, which was already approved by Stewart's Board of Directors, is expected to close late in 2013. Tom Ryan, the chief executive officer of Service Corporation had this to say of the deal, "We are very pleased to announce this agreement to merge Stewart Enterprises into our company. Throughout its 100 year history, and for the last five decades of Frank Stewart's tremendous leadership, Stewart Enterprises has compiled an impressive portfolio of high quality funeral homes and cemeteries across North America. We are extremely excited by the prospect of working alongside the Stewart associates and continuing to build on their success."
Here is a look at the combined company:
· 2168 total locations
· 1653 funeral homes
· 515 cemeteries
· 282 combination funeral home/cemeteries
· Presence in 48 states and 8 Canadian provinces
Together, the new company will have combined revenue of $3.1 billion. Annual cost savings are expected to be $60 million for the combined company. More importantly, the combined company has a huge backlog of over $9 billion in future revenue. This backlog is supported by cash that is already set aside in family trusts or funded by third party insurance providers. This represents a pretty safe future stream of revenue. This backlog also represents more than two times the current market capitalization of Service Corporation.
Service Corporation may be buying Stewart Enterprises at the perfect time. The funeral home operator has a backlog of $1.8 billion. In fiscal 2012, the company posted revenue of $516.1 million, the company's highest in four years. Strong sales were generated in both funeral sales (+10.0%) and cemetery sales (+2.4%). Earnings per share came in at $0.46 vs. the prior year's $0.39. In the most recent first quarter, funeral revenue increased 8.5% to $78.1 million. Cemetery revenue climbed higher 9.1% to $57.6 million, giving the company total revenue of $135.7 million. First quarter earnings per share of $0.18 were the highest quarterly earnings in ten years.
Despite being the leader in the funeral service industry, Service Corporation has a national market share of only 13%. This number will increase closer to the 16-17% mark when Stewart Enterprises is fully integrated. The aging population bodes well as does Service Corporation's key brands and packaged pre-arranged funerals.
Analysts on Yahoo Finance are expecting Service Corporation to earn $0.89 per share in fiscal 2013. On $2.51 billion in sales. Analysts previously saw the company earning $0.97 per share in fiscal 2014. Revenue is expected to be $2.57 billion, a marginal 2.4% increase from expected 2013 sales. With the combined companies, earnings and revenue should come in much higher than that. Combined revenue will be over $3 billion, which will propel earnings higher than the $1 mark.
Service Corporation has a history of acquisitions and has been able to generate strong cash flows from recent deals. With a large funeral home base and backlog, Stewart Enterprises will have a huge impact on future revenue. Investors should consider buying shares of Service Corporation on dips as the company should easily break past fifty two week highs and hit the $20 level.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SCI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.