# Intrinsic value of Service International - SCI

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of SCI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

### STOCK VALUATION INPUT DATA

 Revenue (in 2016), \$M Initial revenue growth rate, % Terminal revenue growth rate, % Revenue decline factor Initial discount rate, % Discount rate multiplier Variable cost ratio, % Fixed operating expenses, \$M Interest rate on debt, % Effective corporate tax rate, %
 Production assets / Revenue, % Life of production assets, yrs Working capital / Revenue, % Revenue / Adjusted assets Adjusted equity ratio Cash flow adjustment, % of Revenue Book value of equity, \$M Shares outstanding, mln Market capitalization, \$bln 6.2

## FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046

### INCOME STATEMENT

Revenue growth rate, %
1.51
5.20
5.18
5.16
5.15
5.13
5.12
5.11
5.10
5.09
5.08
5.07
5.06
5.06
5.05
5.05
5.04
5.04
5.03
5.03
5.03
5.02
5.02
5.02
5.02
5.02
5.01
5.01
5.01
5.01
5.01
Revenue, \$m
3,031
3,189
3,354
3,527
3,708
3,899
4,098
4,307
4,527
4,757
4,999
5,252
5,518
5,797
6,090
6,397
6,720
7,058
7,413
7,786
8,178
8,589
9,020
9,473
9,948
10,447
10,971
11,521
12,098
12,704
13,341
Variable operating expenses, \$m

2,599
2,724
2,856
2,993
3,138
3,289
3,448
3,614
3,789
3,972
3,985
4,186
4,398
4,620
4,853
5,098
5,355
5,624
5,907
6,204
6,516
6,843
7,186
7,547
7,926
8,323
8,740
9,178
9,638
10,121
Fixed operating expenses, \$m

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total operating expenses, \$m
2,542
2,599
2,724
2,856
2,993
3,138
3,289
3,448
3,614
3,789
3,972
3,985
4,186
4,398
4,620
4,853
5,098
5,355
5,624
5,907
6,204
6,516
6,843
7,186
7,547
7,926
8,323
8,740
9,178
9,638
10,121
Operating income, \$m
489
590
630
671
715
761
809
860
913
968
1,027
1,268
1,332
1,399
1,470
1,544
1,622
1,704
1,789
1,879
1,974
2,073
2,177
2,286
2,401
2,521
2,648
2,781
2,920
3,066
3,220
EBITDA, \$m
734
905
952
1,001
1,053
1,107
1,163
1,223
1,285
1,351
1,419
1,491
1,567
1,646
1,729
1,816
1,908
2,004
2,105
2,210
2,322
2,438
2,561
2,689
2,824
2,966
3,114
3,271
3,435
3,607
3,787
Interest expense (income), \$m
157
157
175
204
233
265
297
332
368
406
445
487
531
576
624
675
728
783
842
903
967
1,035
1,105
1,180
1,258
1,339
1,425
1,516
1,610
1,710
1,814
Earnings before tax, \$m
327
433
454
468
482
496
512
528
545
563
581
781
801
823
845
869
894
920
948
976
1,007
1,038
1,072
1,107
1,143
1,182
1,222
1,265
1,310
1,356
1,406
Tax expense, \$m
150
117
123
126
130
134
138
143
147
152
157
211
216
222
228
235
241
248
256
264
272
280
289
299
309
319
330
342
354
366
379
Net income, \$m
177
316
332
341
352
362
374
385
398
411
424
570
585
601
617
634
653
672
692
713
735
758
782
808
835
863
892
923
956
990
1,026

### BALANCE SHEET

Cash and short-term investments, \$m
195
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total assets, \$m
12,038
12,456
13,101
13,777
14,486
15,229
16,009
16,826
17,684
18,583
19,526
20,516
21,555
22,645
23,789
24,989
26,249
27,571
28,959
30,415
31,944
33,549
35,234
37,003
38,860
40,809
42,855
45,003
47,259
49,627
52,113
11,843
12,456
13,101
13,777
14,486
15,229
16,009
16,826
17,684
18,583
19,526
20,516
21,555
22,645
23,789
24,989
26,249
27,571
28,959
30,415
31,944
33,549
35,234
37,003
38,860
40,809
42,855
45,003
47,259
49,627
52,113
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
0.256
Average production assets, \$m
1,987
2,089
2,197
2,310
2,429
2,554
2,684
2,821
2,965
3,116
3,274
3,440
3,614
3,797
3,989
4,190
4,401
4,623
4,856
5,100
5,356
5,626
5,908
6,205
6,516
6,843
7,186
7,546
7,924
8,321
8,738
Working capital, \$m
-184
-281
-295
-310
-326
-343
-361
-379
-398
-419
-440
-462
-486
-510
-536
-563
-591
-621
-652
-685
-720
-756
-794
-834
-875
-919
-965
-1,014
-1,065
-1,118
-1,174
Total debt, \$m
3,308
3,573
4,154
4,762
5,400
6,069
6,771
7,506
8,278
9,088
9,937
10,828
11,763
12,744
13,773
14,853
15,987
17,177
18,426
19,737
21,113
22,557
24,074
25,666
27,337
29,091
30,932
32,866
34,896
37,027
39,264
Total liabilities, \$m
10,945
11,210
11,791
12,399
13,037
13,706
14,408
15,143
15,915
16,725
17,574
18,465
19,400
20,381
21,410
22,490
23,624
24,814
26,063
27,374
28,750
30,194
31,711
33,303
34,974
36,728
38,569
40,503
42,533
44,664
46,901
Total equity, \$m
1,093
1,246
1,310
1,378
1,449
1,523
1,601
1,683
1,768
1,858
1,953
2,052
2,156
2,265
2,379
2,499
2,625
2,757
2,896
3,042
3,194
3,355
3,523
3,700
3,886
4,081
4,285
4,500
4,726
4,963
5,211
Total liabilities and equity, \$m
12,038
12,456
13,101
13,777
14,486
15,229
16,009
16,826
17,683
18,583
19,527
20,517
21,556
22,646
23,789
24,989
26,249
27,571
28,959
30,416
31,944
33,549
35,234
37,003
38,860
40,809
42,854
45,003
47,259
49,627
52,112
Debt-to-equity ratio
3.027
2.870
3.170
3.460
3.730
3.990
4.230
4.460
4.680
4.890
5.090
5.280
5.460
5.630
5.790
5.940
6.090
6.230
6.360
6.490
6.610
6.720
6.830
6.940
7.030
7.130
7.220
7.300
7.380
7.460
7.530
0.078
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100

### CASH FLOW

Net income, \$m
177
316
332
341
352
362
374
385
398
411
424
570
585
601
617
634
653
672
692
713
735
758
782
808
835
863
892
923
956
990
1,026
Depreciation, amort., depletion, \$m
245
316
323
330
338
346
354
363
372
382
393
223
235
247
259
272
286
300
315
331
348
365
384
403
423
444
467
490
515
540
567
Funds from operations, \$m
451
632
654
671
689
708
728
749
770
793
817
793
820
847
876
907
938
972
1,007
1,044
1,083
1,123
1,166
1,211
1,258
1,307
1,359
1,413
1,471
1,530
1,593
Change in working capital, \$m
-13
-14
-15
-15
-16
-17
-18
-18
-19
-20
-21
-22
-23
-25
-26
-27
-28
-30
-31
-33
-34
-36
-38
-40
-42
-44
-46
-48
-51
-53
-56
Cash from operations, \$m
464
2,632
669
687
705
725
745
767
790
813
838
816
843
872
902
934
967
1,002
1,038
1,077
1,117
1,159
1,204
1,251
1,300
1,351
1,405
1,462
1,521
1,584
1,649
Maintenance CAPEX, \$m
0
-129
-136
-143
-150
-158
-166
-174
-183
-193
-202
-213
-223
-235
-247
-259
-272
-286
-300
-315
-331
-348
-365
-384
-403
-423
-444
-467
-490
-515
-540
New CAPEX, \$m
-193
-102
-108
-113
-119
-125
-131
-137
-144
-151
-158
-166
-174
-183
-192
-201
-211
-222
-233
-244
-256
-269
-283
-297
-311
-327
-343
-360
-378
-397
-417
Cash from investing activities, \$m
-216
-231
-244
-256
-269
-283
-297
-311
-327
-344
-360
-379
-397
-418
-439
-460
-483
-508
-533
-559
-587
-617
-648
-681
-714
-750
-787
-827
-868
-912
-957
Free cash flow, \$m
248
2,401
425
431
436
443
449
456
463
470
478
437
445
454
464
473
483
494
505
517
530
543
556
570
585
601
618
635
653
672
692
Issuance/(repayment) of debt, \$m
114
376
581
609
638
669
702
736
772
809
849
891
935
981
1,029
1,080
1,134
1,190
1,249
1,311
1,376
1,444
1,516
1,592
1,671
1,754
1,842
1,933
2,030
2,131
2,237
Issuance/(repurchase) of shares, \$m
-210
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Cash from financing (excl. dividends), \$m
-91
376
581
609
638
669
702
736
772
809
849
891
935
981
1,029
1,080
1,134
1,190
1,249
1,311
1,376
1,444
1,516
1,592
1,671
1,754
1,842
1,933
2,030
2,131
2,237
Total cash flow (excl. dividends), \$m
158
2,777
1,006
1,039
1,074
1,111
1,150
1,191
1,234
1,279
1,327
1,328
1,380
1,435
1,493
1,554
1,617
1,684
1,754
1,828
1,906
1,987
2,072
2,162
2,256
2,355
2,459
2,568
2,683
2,803
2,930
Retained Cash Flow (-), \$m
92
-237
-65
-68
-71
-74
-78
-82
-86
-90
-94
-99
-104
-109
-114
-120
-126
-132
-139
-146
-153
-160
-168
-177
-186
-195
-205
-215
-226
-237
-249
Prev. year cash balance distribution, \$m

84
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Cash available for distribution, \$m

2,624
941
972
1,004
1,037
1,072
1,110
1,148
1,189
1,232
1,229
1,276
1,326
1,379
1,434
1,491
1,552
1,616
1,682
1,753
1,827
1,904
1,985
2,071
2,160
2,255
2,354
2,457
2,567
2,681
Discount rate, %

10.40
10.92
11.47
12.04
12.64
13.27
13.94
14.63
15.37
16.13
16.94
17.79
18.68
19.61
20.59
21.62
22.70
23.84
25.03
26.28
27.59
28.97
30.42
31.94
33.54
35.22
36.98
38.83
40.77
42.81
PV of cash for distribution, \$m

2,377
765
702
637
572
508
445
385
329
276
220
179
143
112
86
65
48
34
24
16
11
7
4
3
2
1
0
0
0
0
Current shareholders' claim on cash, %
100
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

Service Corporation International, together with its subsidiaries, provides deathcare products and services in the United States and Canada. The company operates through Funeral and Cemetery segments. Its funeral service and cemetery operations comprise funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses. The company also provides professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles; arranging and directing services; and removal, preparation, embalming, and cremation services, as well as catering services. In addition, it offers funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, on-line and video tributes, stationery products, casket and cremation memorialization products, and other merchandise. Further, the companyĀs cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization and interment options; and sells cemetery merchandise and services, including memorial markers and bases, floral placements, graveside services, merchandise installation, and burial openings and closings, as well as offers preneed cemetery merchandise and services. Service Corporation International offers its products and services under the Dignity Memorial, Dignity Planning, National Cremation Society, Advantage, Funeraria del Angel, Making Everlasting Memories, Neptune Society, and Trident Society brands. As of December 31, 2016, it owned and operated 1,502 funeral homes; and 470 cemeteries, including 281 funeral service/cemetery combination locations covering 45 states, 8 Canadian provinces, the District of Columbia, and Puerto Rico. The company was founded in 1962 and is headquartered in Houston, Texas.

### FINANCIAL RATIOS  of  Service International (SCI)

##### Valuation Ratios
P/E Ratio 35.5
Price to Sales 2.1
Price to Book 5.8
Price to Tangible Book
Price to Cash Flow 13.6
Price to Free Cash Flow 23.2
##### Growth Rates
Sales Growth Rate 1.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 27.8%
Cap. Spend. - 3 Yr. Gr. Rate 11.3%
##### Financial Strength
Quick Ratio 2
Current Ratio 0
LT Debt to Equity 292.5%
Total Debt to Equity 302.7%
Interest Coverage 3
##### Management Effectiveness
Return On Assets 2.2%
Ret/ On Assets - 3 Yr. Avg. 2.4%
Return On Total Capital 4.1%
Ret/ On T. Cap. - 3 Yr. Avg. 4.4%
Return On Equity 15.5%
Return On Equity - 3 Yr. Avg. 15.3%
Asset Turnover 0.3
##### Profitability Ratios
Gross Margin 22.3%
Gross Margin - 3 Yr. Avg. 22.5%
EBITDA Margin 24.1%
EBITDA Margin - 3 Yr. Avg. 25.7%
Operating Margin 16.1%
Oper. Margin - 3 Yr. Avg. 17.9%
Pre-Tax Margin 10.8%
Pre-Tax Margin - 3 Yr. Avg. 12.2%
Net Profit Margin 5.8%
Net Profit Margin - 3 Yr. Avg. 6.5%
Effective Tax Rate 45.9%
Eff/ Tax Rate - 3 Yr. Avg. 46.1%
Payout Ratio 55.4%

## SCI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SCI stock intrinsic value calculation we used \$3031 million for the last fiscal year's total revenue generated by Service International. The default revenue input number comes from 2016 income statement of Service International. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
We use three input parameters to forecast the revenue growth rate in our SCI stock valuation model: a) initial revenue growth rate of 5.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
The initial discount rate of 10.4%, whose default value for SCI is calculated based on our internal credit rating of Service International, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Service International.
By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of SCI stock the variable cost ratio is equal to 81.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to \$0 million in the base year in the intrinsic value calculation for SCI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.9% for Service International.

Corporate tax rate of 27% is the nominal tax rate for Service International. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the SCI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for SCI are equal to 65.5%.

Life of production assets of 15.4 years is the average useful life of capital assets used in Service International operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for SCI is equal to -8.8%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - \$1093 million for Service International - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 185.58 million for Service International is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Service International at the current share price and the inputted number of shares is \$6.2 billion.