Sci

At a price of $30 per share we could recommend buying SCI stock. From our analysis the stock should be worth between $35 and $38 at the end of 1995; SCI should be worth approximately $4 billion. Our estimate in based on the projected incremental revenue growth.

As show in Exhibit 1, revenues in 1994 will increase in 1995 by $571 millions due to revenues from international acquisitions that were fully accounted for in 1994, the acquisition of Gibraltar plus 80 fill-in funeral homes mergers in the US and expected revenue increases of 7% from price increments and market growth. Similarly, in 1996 revenues should increase by $567 million as a result of year round contributions from the French/European market, the Gibraltar purchase and 150 fill in acquisitions. Finally we expect 1997 revenues to increase by $319 million from greater sales in international markets, operations growth and fill in acquisitions.

In 1995, in order to account for lower margins from international operations, we considered a 24% Operating Profit Margin compared to the 25% in 1994. Margin drops to 23% in 1996 and 22% in 1997.

According to the case, the firm has a shelf registration of $1 billion which we expect will be Ð... equity (20 million shares) and Ð... debt to avoid any costly rating downgrades. Based on historic data the company cost of debt should be around 7%. Exhibit 2 provides an Income Statement summary for the years 1994 to 1997.

The resulting EPS for the years 1995 to 1997 are 1.63, 2.02 and 2.31 which translates to 18% 3-year average growth. With our target PEG ratio of 1 we conclude that share price for 1995 should be $35 rising to $43 for 1996 (see exhibit 3). Additionally when we apply the industry average revenue multiple SCI value is higher, around $48 per share.

Their international acquisition strategy was a key element for the valuation of this company because it was a significant source of revenues, which is extremely critical, in low-growth and fragmented industries such as the death care.

In North America, over the last 15 years the death rate had remained relatively constant (slightly less than 1%) and was expected to remain at this rate for the near future. Additionally, as the number of large consolidators diminished, and acquisition-related growth decreased, the opportunities for local future growth were limited to "fill-in" acquisitions. As a result, the domestic revenues were not expected to grow at the same rate as previous years.

Their international acquisitions typically had lower gross profit margins in the first years, until they were assimilated into the company's cluster management strategy. However, in the following years, they not only allowed the company to efficiently