Recent performance snapshot

Service Corporation International (SCI) stock has been under pressure recently, with the share price down about 3% over the past day, 7% over the past week and 11% over the past month.

Over the past 3 months the stock has fallen roughly 13%, and the 1 year total return is down about 8%. During this period, the company has reported annual revenue of US$4.33b and net income of US$535.54m.

Putting that in context, SCI’s share price has been under steady pressure in recent months, yet longer term total shareholder returns over 3 and 5 years remain positive. This suggests momentum has faded rather than completely reversed.

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With SCI trading below some valuation estimates and recent returns under pressure, the key question now is whether the current price reflects a discount on a steady US$4.33b revenue business or whether the market is already factoring in its future growth.

Price-to-Earnings of 18.3x: Is it justified?

On a P/E of 18.3x, Service Corporation International trades at a higher earnings multiple than both its Consumer Services industry average of 16x and its peer group at 12.2x, even though the share price has recently come under pressure.

The P/E multiple shows how much investors are currently paying for each dollar of earnings, which matters a lot for a mature, earnings generating business like SCI. A higher multiple often reflects confidence that current profits are sustainable, or that future earnings could be stronger than the recent past would suggest.

Here, the message from the data is mixed. On one hand, SCI screens as expensive versus both its industry and peer averages, which implies the market is paying a premium for its earnings. On the other hand, the estimated fair P/E of 20.1x suggests there is still some room for the earnings multiple to move closer to that level if the market continues to value its cash flows in a similar way.

Compared with the wider Consumer Services group on 16x, SCI’s 18.3x P/E stands out as clearly higher, and the gap is even wider relative to peers at 12.2x, which reinforces that this is not a low multiple stock right now. Yet, against the estimated fair ratio of 20.1x, that premium looks less stretched and points to a valuation that could converge toward the fair P/E level if current assumptions hold.

Result: Price-to-Earnings of 18.3x (ABOUT RIGHT)

However, you still need to watch for risks such as a reset in market expectations around its fair P/E, as well as any pressure on its US$4.33b revenue base.

Another View: DCF points to undervaluation

The earlier P/E check suggested SCI is roughly fairly priced on earnings, but the SWS DCF model tells a different story. With the stock at $71.01 versus an estimated future cash flow value of $83.97, the model implies SCI is trading at about a 15.4% discount. Which signal do you trust more: current earnings or long term cash flows?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Service Corporation International for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 46 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

There are mixed signals so far, with pressure on recent returns but some support from valuation models and fundamentals. It makes sense to review the underlying data yourself, weigh the risks against the potential rewards, and start by checking the 4 key rewards and 3 important warning signs.

Looking for more investment ideas?

If SCI no longer feels like the only stock worth your attention, now is the time to widen your search and line up fresh opportunities before others spot them.

• Zero in on quality at a discount by scanning 46 high quality undervalued stocks that combine solid fundamentals with prices that may not fully reflect their strengths.
• Strengthen your income stream by reviewing 11 dividend fortresses that aim to balance higher yields with more resilient payouts.
• Stay on the front foot by tracking 63 resilient stocks with low risk scores that score better on financial health and overall risk so surprises are less likely to catch you off guard.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.