Stonemor: Time For Another Secondary Offering?

| About: StoneMor Partners (STON)

We've previously highlighted our bearish view on Stonemor (NASDAQ:STON), based on the following key points:

  • Stonemor generates little free cash flow, yet lures investors in with an unsustainable dividend, financed in the past few years by periodic, large stock offerings.
  • The founding LP which owned 52% of STON stock at the time of the IPO, was a major seller in each of the last offerings, completely cashing out in the March 2011 issue.
  • The quality of their "Non-GAAP" accounting has been watered down over time to make it appear that the company's finances are more robust than they appear. In particular, Stonemor's adding back of most working capital to come to free cash flow is disingenuous, because no delivery of good or services is occuring when STON records increases in accounts receivable or deferred revenue. Their peers have robust cash flow: STON's is dismal.

Stonemor's last secondary was nearly two years ago, in February 2011. They issued 3 million shares at $29.25 (shares have fallen 27% since, for a total return of -13%). Given that the previous offering was only months prior, twenty months seems a long time for a business which isn't self financing. So it got us thinking, is STON due for a trip to the well?

STON finished the 3rd quarter of 2012 with $236 million in debt and a mere $8 mil in cash. Distributions to shareholders YTD have been $35 million and entirely financed with debt given that STON spent all their operating cash flow on capex and $25 million in acquisitions. Additional borrowing availability under their revolver is down to $46 million.

In comparison, at YE10, prior to STON's $85 million secondary, cash was at $7 million annd debt was $220.5 mil. It appears that $65 milion was available at year end, but STON was on the verge of redeeming $35 million in very high cost (12.5%) notes with the upcoming offering.

Stonemor has averaged half a dozen acquisitions per year the past few years, almost entirely with cash. Distributions consume $47.3 million per year. Furthermore, while cash generation has been improved (but far short of sufficient) this year, 4th quarter cash generation has been weak the past two years:

STON 4Q Operating Cash Flow
4Q11 4Q10
CFO -$5.6 mil -$6.65

After capex, the distribution of $11.8 million this quarter, and assuming a $6 million negative CFO this quarter, the company could burn through $20.7 million this quarter. This would bring revolver availability down to $25 million. By year-end the company could be very stretched.

Thus it appears one of several scenarios is likely:

  • The company goes for another secondary.
  • Cash generation remains at the improved level of the past 9 months and STON ceases acquisitions.
  • Cash generation improves substantially.

The weaker cash performance of the past few years casts doubt on the quality of many of STON's acquisitions. Thus we think it likely that STON has to go back to the equity market. With markets selling off since late October and STON 28% off since their last secondary, this is presently a dicey proposition. Shares outstanding have already risen 130% since the end of 2007. It's questionable how much more stock the market will digest.

Disclosure: I am short STON. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.