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From the Survey: StoneMor Partners L.P.
StoneMor Partners (STON) is a master limited partnership funeral services provider that manages over 230 cemeteries and more than 60 funeral homes in the United States and Puerto Rico. The company was created in 2004 to own and operate the assets and businesses previously owned by Cornerstone Family Services Inc., which was formed in 1999. Since its IPO, the company has grown to become the second largest owner and operator of cemeteries in the United States. Now, it participates in the sales of burial plots, lawn and mausoleum crypts, cremation services, caskets, and funeral services, on a pre-need and at-need basis.
This wide range of merchandise and service products has helped StoneMor keep pace with other participants in this slow-growth industry. Competitors like Stewart Enterprises Inc. (STEI), Service Corp International (SCI), and Matthews International (MATW) share similar product offerings, geographic locations, and thus, business strategies. These industry participants have historically focused on customer service, cost control, and company buyouts for the highest returns. In fact, acquiring privately owned funeral homes and cemeteries in the United States has, for some time, represented the best option for growth. These prospects are plentiful, and they require little capital to integrate. When noting that the industry is at the mercy of a fluctuating death rate to generate top-line advances, geographic expansion becomes the best strategy. This operating environment leaves many investors unimpressed, however, necessitating the presence of a well financed dividend to entice commitment.
The dividend is one of StoneMor’s most attractive attributes, as a master limited partnership. The status allows the company to avoid some corporate taxes, while offering one of the highest distribution totals on the market today, which tends to be a tax-free return of capital rather than taxable dividend income. This is possible thanks to its sales of plots and mausoleums as a form of real estate. The company’s total distributions have increased in a consistent fashion since its conception and, barring unforeseen occurrences, the trend should persist. However, over the last few years, its distributions have exceeded cash-flow per share, indicating that distributions are being funded through debt issuance. This is disconcerting, given the company’s relatively high debt total. Still, the defensive nature of the industry provides comfort for future growth, and the capability to continue to award its shareholders.
However, StoneMor’s ability to provide expectations for long-term growth have been poor, as of late. Industry-wide struggles last year left its share price down about 15%, and its strategic acquisitions have done little to alleviate top-line concerns. During the period, the death rate descended at a quick pace, and pricing strategies were constricted by declining consumer spending and other macroeconomic pressures. This is the nature of the industry. Nevertheless, companies like StoneMor need to expand in order to turn profits under these conditions. This prompted the acquisition of the Lohman Group during the third quarter, a funeral home operator out of Florida that owns nine funeral homes and four cemeteries in the region.
This acquisition, along with favorable demand statistics, has the potential to help StoneMor turn the corner in 2013. The company and many of its industry peers have seen pre-need services segments note positive trends over the last six months. Historically, trends of this nature imply an increase in the death rate. And with baby boomers steadily surpassing the age of retirement, their accuracy may once more hold true. Under no circumstances does this shift in demand guarantee that consumers will return to spending more on funeral services and merchandise. In fact, there is no promise that the economic climate will shift in favor of the funeral services industry at all. We submit, however, that StoneMor Partners is in solid position to take advantage of opportunities that arise, despite its recent struggles.
For a more detailed evaluation of StoneMor’s business prospects, as well as our take on the investment merits of the stock, subscribers are encouraged to check out our full page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.