SERVICE CORP INTERNATIONAL (SCI) stock intrinsic value fair value estimate & owner earnings analysis

Service Corporation International is North America's largest funeral and cemetery operator, running about 1,500 funeral homes and 500 cemeteries in the United States and Canada, mostly under the Dignity Memorial name. It earns money two ways: at the time of death (funerals, cremations, burial) and in advance, by selling prearranged funerals and cemetery property years before they are needed. At December 31, 2025 it held a $17.0 billion backlog of these prearranged contracts, up from $16.0 billion a year earlier, which is future revenue already sold. In 2025 revenue was $4.31 billion; comparable funeral revenue rose 1.7% as average revenue per service rose 2.9% while the number of services fell 0.8% and the cremation rate climbed half a point to 64.4%. That is the core tension in this business: steady price increases offset by a slow drift toward lower-priced cremation. How we measured earnings. We start from cash generated by operations, remove short-term swings in working capital (including the timing gap between cash collected on prearranged contracts and revenue recognized when services are delivered), subtract stock compensation as a real cost, and subtract the capital spending needed to maintain the business. Capital spending has risen from about $240 million before 2020 to $389 million in 2025, and nearly all of it is treated as upkeep because revenue has grown only modestly. On this basis owner earnings were $557 million in 2025 ($3.91 per share), up 7.4% from $519 million in 2024. Because the company carries significant debt, we value the business before its lenders by adding back cash interest (about $253 million in 2025), then subtract the debt once at the end. The starting level. We use the median of 2022-2025, the years that reflect the business after the pandemic-era surge in deaths had passed; 2020-2021 were inflated by elevated mortality and earlier years describe a smaller business. One adjustment: in 2023 the company changed a tax accounting method for its cemetery segment, which its filings say will defer cash taxes into future years; we removed that $191.5 million one-time benefit from 2023. The resulting starting level is about $744 million a year of cash before interest, or about $5.38 per current share. Base case ($64.80 per share). Cash flow grows 1.5% a year for ten years, then holds flat. This credits only the company's long, demonstrated record of raising prices faster than its volumes erode, and it is well below the 6.5% growth the business actually delivered in 2025, because last year's gain included favorable timing and we do not want to project it forward. We do not credit growth from acquisitions (we also do not charge the roughly $100 million a year spent on them), from an aging population lifting death rates, or from further margin gains. Beyond year ten we assume the network of funeral homes and cemeteries keeps earning at the year-ten level, with no further growth, because the physical network and the prearranged backlog are durable but nothing we can verify today extends growth that far. The business is worth about $13.9 billion ($100.80 per share); it owes about $5.0 billion ($36 per share); the difference is about $64.80 per share. Bear case ($38.70 per share). The starting level is about 10% lower, at $670 million, reflecting two risks named in the filings: the deferred cemetery taxes beginning to come due (roughly $40 million a year), and the extra trust income the company has been keeping under its unclaimed-property agreement with Florida in 2023-2025 not continuing, along with weaker volumes. Cash flow then shrinks 1% a year for a decade as cremation keeps rising and wage costs (employee compensation payments rose $20 million in 2025 alone) outrun price increases, and then holds flat. Even here the business covers its interest bill more than twice over, so the debt is serviceable. The business is worth about $10.3 billion ($74.70 per share); it owes about $5.0 billion; the difference is about $38.70 per share. Bull case ($106.90 per share). Price increases continue at the pace of recent years, the prearranged backlog keeps converting, and small acquisitions keep adding locations, lifting cash flow 3.5% a year for ten years and 1.5% a year thereafter, in line with the company's long record of raising prices. The business is worth about $19.8 billion ($142.80 per share); it owes about $5.0 billion; the difference is about $106.90 per share. Debt. At June 30, 2026 total borrowings, including finance leases and the headquarters facility, were $5.30 billion, against $260 million of cash, of which we treat about $100 million as needed to operate. Much of the debt is fixed at rates below current market levels (3.375% notes due August 2030, 4.0% notes due May 2031, 4.625% notes due December 2027, 5.125% due June 2029, 5.75% due October 2032), which we value as a benefit of about $170 million. Net of these items the shareholders' share of the business is reduced by about $4.97 billion. Nearest maturities are $137 million of 7.5% notes in April 2027 and the 4.625% notes in December 2027; term loans and the bank facility mature in January 2028 and November 2030. Refinancing the low-coupon notes at higher rates after 2030 will raise interest costs, which is already reflected in how we valued the debt. Change since our previous analysis. In August we estimated a base value of $32. That estimate effectively charged the company's debt twice, once through the interest already deducted from cash flow and again by subtracting the borrowings, and it used higher, risk-adjusted discount rates. We now value the business before its lenders, subtract debt once, and use a single 6% rate, carrying risk in the spread between the cases instead. At the same time we assume much slower growth than before (1.5% a year in the base case, versus 5% previously). Lowering growth and correcting the debt treatment pull in opposite directions; the net effect is a higher estimate. What would make this wrong. A faster shift to low-cost direct cremation providers, a sharp drop in prearranged cemetery sales like the one after the 2021 peak, or a large tax payment as the deferred cemetery taxes reverse would push results toward the bear case. The company does not quantify how much extra income the Florida unclaimed-property agreement added, and unclaimed-property audits in other states remain open; we could not size either from the filings. Margin-of-safety price. Because outcomes for a funeral business are unusually predictable, the bear case is only about 40% below the base case, but the company's debt magnifies any shortfall. From $45 the base case implies roughly 20% a year if the shares reach base-case value within about three years, with the value itself growing and about $1.40 a share of annual dividends adding to the return, while the 10th-percentile outcome of $38.70 implies a loss of about 14%. The margin-of-safety price is $45.