Gloomy news about the recession and declining industrial output means little at the modern office building in Houston that houses Service Corporation International. SCI's prospects are rosy.
SCI owns the nation's largest chain of funeral homes and cemeteries--including Joseph Gawler & Sons of Washington--and recently strengthened its position by buying out the company that had been number two. With its acquisition of IFS Industries, SCI became a unique giant of the funeral trade, to which it has brought management style and operating techniques as different from the traditional funeral home as the supermarket is from the mom-and-pop grocery.
The story of SCI offers proof of every bromide about clouds and silver linings. With the nation's death rate rising after a long decline, SCI executives say they are assured of continued growth in a recession-proof industry.
Though its name seems designed to mask the nature of its business, which company executives admit many people don't like to talk about, SCI is actively seeking publicity in an effort to enhance the value of its stock. SCI executives have been touring the country telling brokers and investment analysts about the company's prospects, and the analysts have responded with a deluge of reports recommending SCI stock to their clients. As a result, SCI stock, which sold for less than $6 a share on the New York exchange last year, has recently risen as high as $25.
"Mortality rates are likely to begin rising during the '80s," the Value Line Investment Survey noted. "This depressing projection augurs well for SCI's business."
"A lot of people don't care to know about this due to the nature of the business," said Paul Page, SCI's director of shareholder relations. "No one knew anything about us so we undertook a program to go on the road and have meetings with the financial community and brokers." He said that "the financial community looks for businesses that are recession proof. We are in the forefront of that requirement."
Page said a joke circulating at SCI's Houston headquarters since the $28 million takeover of IFS Industries is that "we should buy H&R Block too. That way we would be in on both of the sure things in life."
It may seem somehow macabre to make a profit on death and bereavement, but there is nothing depressing about SCI's balance sheet. With the merger, SCI owns 289 funeral homes in 29 states, the District of Columbia and Canada, many of them occupying choice parcels of big-city real estate, and 51 cemeteries, many of which have surplus land that SCI expects to sell off to real estate developers.
The company also owns flower shops and a fleet of limousines, and its combined annual revenues are over $180 million.
Sales, earnings, dividends and book value of SCI assets have all grown by at least 11.5 percent a year for the past five years, and industry analysts project still greater growth now that IFS industries has been absorbed. SCI operates under the terms of a 1976 agreement with the Federal Trade Commission, which accused SCI of unethical practices, but the company says the restrictions it was forced to accept have not adversely affected its earnings.
The FTC, as part of a wide-ranging investigation of funeral home practices, charged that establishments owned by SCI had overcharged customers for obituary notices, flowers, limousines, clergy honoraria and other services, made payoffs to police officers and morgue attendants to be told of deaths, and pressured customers who wanted cremation to purchase caskets anyway by saying the law required it. SCI did not acknowledge any violations of law, but it agreed not to engage in such practices in the future and to make restitution to customers who had been overcharged.
Funeral homes have traditionally been small, family owned businesses, but according to Howard Raether, head of the National Funeral Directors Association, "there is a slow but growing trend toward merger, consolidation or acquisition."
SCI is in the forefront of that trend. It owns only about 1.4 percent of the 22,000 funeral homes in the U.S. and Canada but it takes in nearly 5 percent of the revenues, and its holdings include some of the best-known names in the business. In addition to Gawlers, the company owns the Tyson Wheeler Funeral Home on Rockville Pike, the Frank E. Campbell Funeral Home in New York and the Riverside Memorial Chapels in New York and Florida.
The company's annual report identifies sites it owns in Colorado Springs, the Dallas area, Denver, Vancouver and Kansas City as suitable for residential or commercial real estate development. "While SCI does not purchase real estate for purposes other than use in our business," its most recent annual report said, "some of our funeral homes are located on property that has greatly appreciated in value through the years" and the company plans to take the potential profits on the sites by relocating the businesses.
SCI scored a real estate coup last year by trading a funeral home it owned on a prime corner in Houston's Galleria area to American General Insurance Co., the biggest stockholder in SCI, for 709,461 shares of SCI's own stock--an $11 million deal that was not taxable. Investment analysts in New York and Texas say other SCI properties are worth far more than their book value and represent potential long-range profits at no capital expense.
In addition, it has developed a lucrative ancillary business in prepaid funerals. Last year the company wrote about $25 million worth of contracts with prospective clients who paid for their burial services in advance. The advantage to the customer is a paid-up funeral at current prices, no matter how much costs rise before death occurs. The advantage to SCI is that funeral costs are rising only about 5 percent a year but the money can be invested at more than 10 percent.
"High inflation doesn't bother us much," company president B.B. Hollingsworth Jr. told New York investment analysts last spring, "because we have this large pool of interest-sensitive cash." Funeral prepayment contracts are legal only in Texas, Florida, Missouri, Colorado and Washington, but SCI officials say they expect to expand this part of the business as more states approve it.
SCI's pattern is to buy what Page called a "market leader" funeral home such as Gawler's, retain the local name and traditions, and cut costs through "purchasing power and economies of scale." The company also establishes tie-ins between the funeral homes and its flower shops, many of which now operate inside the funeral parlors.
According to a report on SCI by Prof. Edward E. Williams of Rice University, done for SCI, funerals require substantial investments in equipment and personnel, and funeral-home profitability is determined by volume. The average receipts for a U.S. funeral home in 1979 were $122,000, but receipts for SCI-owned homes averaged $485,000, Williams said.
Before the merger with its nearest competitor, SCI told industry analysts that it plans to double the size of the company in the next five years, mostly through acquisitions and through the construction of funeral homes within company-owned cemeteries. The company's existing debt consists mostly of low-interest mortgages on its properties, more than covered by the cash flow from the funeral homes and cemeteries, and industry analysts say the company is in a strong position to increase its market share of one industry that is certain to grow in the coming decade.