Service Corp's $0.21 Guide Cut Is a Timing Story—Until It Isn't
Preneed sales and $750 million of free cash flow are intact; funeral volumes, fixed costs, and cemetery recognition are not behaving as promised.
SCI · Earnings Call · 2026-10-29
The rebound that didn't arrive
Service Corporation International came into 2026 with a well-rehearsed script: funeral volumes would be soft early, recover through the year, and the demographic tailwind would eventually do the heavy lifting. The third quarter broke that script. Adjusted EPS of $0.97 was still up more than 11% year over year, but the company cut fourth-quarter guidance to $1.10-$1.20 and now sees full-year normalized EPS at roughly $3.99 at the midpoint, down from the $4.20 it laid out in February. The shares were already about 15% below their November 2024 peak and roughly 13% below their July 2026 high before this print, so this is a report landing in a drawdown, not a breakout.The biggest swing factor was volume. Tom Ryan said “full year volumes now projected to be approximately 200 basis points below our initial expectations” — Thomas Luke Ryan, CEO · 2026-10-29, and October was worse than planned: “October, we are looking at volumes and they are down slightly versus being up, which is where we had them forecasted” — Thomas Luke Ryan, CEO · 2026-10-29. That matters because prior calls had effectively promised a back-half recovery. In April, Ryan explained the historical pattern: “the first quarter is the worst, the second quarter is still not great and you tend to start trending in the back half of the year” — Thomas Ryan, Chief Executive Officer · 2026-04-30. By July, he was still saying “we feel pretty good that the percentage that we're at now will continue to shrink as we get to the back half of the year” — Thomas Ryan, CEO · 2026-07-30. The back half is now here, and the volume line is still the problem.While year over year comparisons delivered impressive quarterly earnings per share growth, revenues and earnings were below our internal expectations. As lower than anticipated funeral volumes, lower general agency commission rates, higher fixed costs, a higher selling compensation rate, and larger deferrals of cemetery sales production put downward pressure on revenues and earnings versus our expectations.
The cost story is half macro, half self-inflicted
The cost side is where the quarter gets more interesting. SCI's fixed cost growth accelerated from 2.7% in the second quarter to 4.1% in the third, a swing management did not see coming. Ryan put it plainly: “in the second quarter, our fixed cost grew at 2.7%. And in the third quarter, they grew at 4.1%” — Thomas Luke Ryan, CEO · 2026-10-29. Healthcare, fuel, promotional spend around the cremation-memorialization rollout, and the new guaranteed-hourly-wage sales plan all hit at once. Some of this is macro. fuel cost and healthcare cost are showing up across this week's reporters, and SCI is not alone in that. But the general agency commission rate is distinctly company-specific: product mix shifted away from multi-pay to single-pay insurance, and the cancellation-reserve effect persisted. The new compensation plan added 40 basis points to the funeral selling-compensation rate and 100 basis points to the cemetery rate, costing roughly $1 million and $5 million respectively. It is a retention initiative that may be working on people, but it is costing more than planned on the P&L. Management had told us this headwind would fade by the third quarter. On the July call, Ryan said the selling-compensation changes would “go away in the third quarter. So we've been bearing the brunt of this and it's -- so Funeral margins should get a little better” — Thomas Ryan, CEO · 2026-07-30. Instead, the selling cost line is still elevated. On the Q3 call, Ryan sized the promotional piece at “about $2 million for the quarter... about the same in the fourth quarter” — Thomas Luke Ryan, CEO · 2026-10-29. That is not a one-off; it is a run-rate until management proves otherwise.The cemetery 'good problem' is still a problem
Cemetery is the paradox. Preneed cemetery sales production grew 5%, or $17 million, in the quarter, and is up 7.5% for the nine months—ahead of the 4%-5% original plan. The company is selling more cemetery sales productions than expected. But revenue recognition lagged because the mix skewed toward merchandise, services, and undeveloped property, where revenue is deferred until performance obligations are satisfied, while a greater portion of the related selling compensation is fixed and recognized immediately. That timing mismatch knocked about 100 basis points off the cemetery revenue recognition rate and turned a sales beat into an earnings headwind. The prior call had set a cleaner expectation. In July, CFO Eric Tanzberger said:On the Q3 call, that target became softer: “the fourth quarter, you should see a higher recognition rate overall... I think it is gonna get marginally better” — Thomas Luke Ryan, CEO · 2026-10-29. A timing mismatch can be forgiven once. This is now a multi-quarter pattern, and the market will start treating the recognition-rate line as a forecasting problem rather than a seasonal quirk.We expect to have higher 90 percentages, if you will, in the back half of this year. That would be very consistent with the back half of last year. But it also -- so we should end up somewhere around that 95%.