Over the past six months, Service International’s shares (currently trading at $77.45) have posted a disappointing 11.2% loss while the S&P 500 was down 2.1%. This might have investors contemplating their next move.
Is there a buying opportunity in Service International, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Service International Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why SCI doesn't excite us and a stock we'd rather own.
1. Inability to Grow Funeral Services Performed Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Service International, our preferred volume metric is funeral services performed). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Over the last two years, Service International failed to grow its funeral services performed, which came in at 97,854 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Service International might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Service International’s revenue to rise by 2.6%, close to its 2.3% annualized growth for the past two years. This projection doesn't excite us and indicates its newer products and services will not lead to better top-line performance yet.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Service International’s ROIC averaged 4.4 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Service International isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 19.7× forward P/E (or $77.45 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Service International
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