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 ½ equity (20 million shares) and ½ 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 ...