The Coronavirus' Potential Impact On Service Corporation International's Stock Price

Service Corporation International (SCI) is the largest owner in the industry referred to as “deathcare” businesses comprising funeral homes, cemeteries, and crematories in the United States and North America.

The question for this analysis is what level of impact will the Coronavirus (COVID-19) need to materially impact SCI’s earnings?

The Coronavirus Has a Significant Mortality Rate

On December 31, 2019, the World Health Organization was informed of a cluster of cases of pneumonia of unknown cause detected in Wuhan City, Hubei Province of China. That cause is now commonly known as the Coronavirus.

Since then, as of March 2, 2020, the number of confirmed Coronavirus cases has risen to 89,840 with 3,061 deaths. The rough fatality rate is thus 3.4 percent, although likely somewhat higher since fatalities necessary lag the diagnosis of new cases.

A detailed review of cases reflects 18 percent of active infections are in serious or critical medical condition. For cases which have closed, one way or the other, 6 percent resulted in death.

At this time, a small number of deaths have been reported in North America. The Centers for Disease Control and Prevention has warned the question is not if, but when, the outbreak spreads in the United States. Media reports reflect infections throughout the United States. The scope of the outbreak is currently unknown and may have been spreading undetected due to limited testing for the virus

SCI Share of the North American Death Industry

In 2018, there were 2,839,205 deaths in the United States. The death rate was 867.8 deaths per 100,000 population. This was in line with the death rate for prior years.

Year	Deaths	% Change
2017	2,813,503	2.52%
2016	2,744,248	1.17%
2015	2,712,630	3.28%
2014	2,626,418	1.13%
2013	2,596,993	2.11%
2012	2,543,279	1.11%
2011	2,515,458	1.90%
2010	2,468,435

The number of deaths per year, and the death rate per 100,000 people, has slowly increased the last decade, but the increases have been small percentage-wise.

Year	Deaths Per 100,000	% Change
2017	863.8	1.71%
2016	849.3	0.63%
2015	844.0	2.46%
2014	823.7	0.27%
2013	821.5	1.39%
2012	810.2	0.36%
2011	807.3	0.98%
2010	799.5

In 2019, there were 287,725 deaths in Canada. The Canadian death rate is slightly higher than the United States death rate at 880 per 100,000 people.

Assuming a 2 percent yearly increase in total deaths, due to a slowly increasing death rate plus an increasing population, by my calculation in 2020 the anticipated number of deaths in North America will be about 3,247,388.

(This number is arrived by multiplying the United States 2018 number of deaths by two percent to arrive at an estimated number of 2019, then multiplying that number by two percent to obtain a number for 2020, and multiplying the 2019 deaths in Canada by two percent.)

SCI estimated in its most recent 10-K that the company has a 15-16 percent North American market share based on total industry revenue.

Although a market share based on revenue is not the same as market share based on the number of deaths, I consider there to be a reasonable ballpark approximation. There will be some variation, as SCI may be involved in providing funeral services at a mortuary, but not providing burial or cremation services. Conversely, SCI may perform a cemetery burial or cremation, but not provide funeral services. Or it may provide all deathcare related services for a family.

SCI’s recent 10-K reports the company provided 307,702 funeral services during 2019, with an average revenue per service of $5,239.

I did not see a breakout in the 10-K for the number of cemetery and cremation services not associated with funeral services.

Applying a 15 percent market share to the total number of expected deaths in North America this year, that equates to about 487,108 deaths as being SCI’s market share.

Evaluating the Coronavirus Impact

With these numbers, 15 percent market share and 487,108 death market share, you can follow the impact of the Coronavirus and evaluate the impact on SCI’s bottom line from this, or any other unusual event causing a significant and atypical amount of deaths.

Roughly, a 30,000 death event equates to a one percent expected increase in use of SCI services.

Or, just looking at the 300,000 funeral services the company performed last year, a 30,000 death event equates to about a 1.5 percent expected increase in funerals. That is, a 15 percent market share of 30,000 deaths is 4,500 deaths which is a 1.5 percent increase in the 300,000 funeral services the company expects to perform anyway.

The last significant virus pandemic was the swine flu in 2009. Then, it was estimated 24 percent of the world’s population became infected. The CDC estimates that virus killed between 151,700 and 575,400 people worldwide.

In the United States, the CDC reports the Swine Flu (aka H1N1) infected 60 million people and killed 12,469. That fatality rate was only .02 percent. At the time, SCI had (per the 2009 annual report) a 12 percent market share based on industry revenue. The 12,469 deaths and smaller market share was not large enough to materially impact the company.

The SARS outbreak did not cause any deaths in the United States. Similarly, Ebola only resulted in four cases and one death in the United States.

In my view, the Coronavirus is thus tracking into uncharted territory due to its fatality rate and potential for mass infection.

SCI’s Earnings

SCI recently held an earnings call on February 17, 2020. There was no discussion of any impact the Coronavirus may have.

At that time, there were no reported US cases of unknown origin - compared with someone who became infected in China and then traveled to the US. The Dow Jones was near an all-time high of 29,398 on the 17^th.

On February 25^th, National Economic Council Director Larry Kudlow said, “We have contained this. I won’t say [it’s] airtight, but it’s pretty close to airtight.”

That changed the next day when the first US unknown origin case was confirmed in Northern California for a patient admitted to a hospital on February 19^th. Since then, as previously mentioned, cases have spread throughout the country.

SCI did say, for 2020 “core funeral revenues are anticipated to grow in the 1% to 2% range. We expect both funeral services performed and sales averages to be flat to slightly up for the year…”

Management referred to both increased sales and increased revenue per sale.

Based on organic revenue growth, acquisitions, and share buybacks, management provided guidance that earnings per share would, on the high end, increase 8 to 12 percent during 2020. About half of the EPS growth was from earnings and half from acquisitions and share buybacks. Per management:

“Normalizing for the tax rate, the mid-point of our guidance from an operational perspective is projecting earnings per share growth more towards the upper range of our 8% to 12% annual earnings per share growth target. We believe this increase will come as it has historically with the organic businesses contributing roughly 4% to 6% growth in earnings per share, in contributions from recently acquired businesses, as well as the effect of the 2019 and 2020 share buybacks contributing an additional 4% to 6% of earnings per share growth.”

Again, per the recent 10-K, on a consolidated basis, the company has gross profit of 23.5 percent of total revenue. Disregarding overhead and other expenses to try and separate fixed from variable costs, the gross profit percentage rises to 32.2 percent.

Although the 10-K is not broken down into as minute detail as would be desired for this analysis, the company achieves significant gross profit per additional service after deducting variable costs and not considering fixed expenses such as overhead.

If, on the funeral side, revenue per service is $5,239, then an additional 4,500 funeral services is worth $23,575,500 in service revenue. Assuming a 32.2 percent profit margin $16M is added to gross profit, a two percent increase.

Recommendation

There is currently no impact on the company’s bottom-line from the Coronavirus.

The media attention on the Coronavirus will be hard to miss, especially if the number of cases in North America significantly increases and more deaths occur. Media attention or panic should not impact the company's bottom-line, but actual deaths can.

Management is expecting core revenues to increase 1 to 2 percent for the year, which is in line with the natural increase in the number of deaths occurring per year.

By my calculations, 1 to 2 percent is an increase equivalent to about an additional 4,870 to 9,740 deaths per year being serviced by the company, or 3,000 to 6,000 funeral services.

If the Coronavirus results in 30,000 North American deaths, SCI’s 15 percent market share based on revenue results in an additional 4,500 decedents SCI is providing services for. That is approaching only one percent of total services and will add perhaps two percent to gross profit.

At this point, it is pure speculation to assume any number of North American deaths. Personally, 30,000 seems like a lot to me. At the currently seen mortality rate, it is almost a million infections.

However, the CDC estimates during the flu season to date, there have been upwards of 41,000,000 influenza infections and 41,000 influenza related deaths - a .1 percent mortality rate.

The Coronavirus is not influenza, but with more than 10 percent of the population possibly being infected by influenza this year, the potential for mass spread of a virus is shown. A 3.4 fatality rate for this infection level would be upwards of 1,394,000 deaths. Fifteen percent market share of that is 209,100 death services, which would substantially increase SCI’s business by over 40 percent.

My recommendation is to watch the situation. Separate media hype (which may affect other industries) from actual North American deaths. If it turns out there is little to no impact in North America, then it is a non-event insofar as SCI's stock is concerned. If an influenza type infection rate occurs, with the mortality rate seen so far in the rest of the world, SCI’s stock will substantially increase in value.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.