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StoneMor (STON) (Business (As of December 2017, average remaining sales…
StoneMor (STON)
Business
As of December 2017, average remaining sales life of 206 years.
Cemetery operations are 82% of revenues, Funeral Home operations accounts for 18% of revenues (2017)
Segment 1: 316 cemeteries (2017). Sold in pre-need and at-need types. At-need are paid for in full at time of sale. Pre-need are paid for in instalments and are recorded as deferred revenue ($900M in 2017)... collect money but don't provide services and invest for many years.
Segment 2: 93 funeral homes (2017). 44 are located on the same grounds as the cemetery properties in Segment 1.
2821 full time staff. 815 sales staff. "substantially all of sales force compensated based solely on performance". Selling is through mail, websites and cold calling
Growing through acquisitions. 2018 acquired 6 cemeteries for $2.5M and land for a cemetery for $2.4M. 2017 acquired none. 2016 acquired ten cemeteries, three funeral homes and a grant company all for $10.6M. 2015 acquired 4 cemeteries and 7 funeral homes for $19.7M.
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Perpetual care trust does not below to Partnership. Merchandise trusts do below to partnership and are invested in equities, fixed income and mutual funds
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Becoming a corporation to reduce debt costs and increase public ownership (some investors can't hold LPs)
In 2017 scrubbed nearly 1.1M pre-need accounts dating back 10 years to make sure they were accurately recorded
Valuation
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2017 had $14.7M in professional fees for the delayed filing of annual report.... ONE-TIME ITEM. Typically at $~$39M... but jumped to $52M in 2017.
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Deferred revenue of $0.9B is recorded as a liability on the balance sheet?... Direct costs associated with pre-need sales like commissions are recognized as deferred selling and obtaining costs on the balance sheet as an Asset... but this is only $130M... discrepancy?
Trusts: Merchandise trust will release income (and accompanying investment income) as merchandise is settled with customer.
Perpetual Trust: $ must be kept in perpetual trust, but investment income can be withdrawn for cemetery maintenance
Deferred revenues were $912.6M as of Dec 2017 and Deferred selling and obtaining costs were only $126M... "The [inaudible] deferred selling and obtaining costs represents almost $780 million in revenue relating to pre-need billings that will flow through our income statement in the future with little selling effort on our part. This compares to $750 million at the end of the 2016. It represents a significant backlog of business and highlights the fact that our balance sheet is often underappreciated aspect our business. "... THESE PRE-NEED BILLINGS ARE NOT INCLUDED IN BANK EBITDA CALCULATIONS
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A perfect storm of ugliness: $46M impairment, complex financials, high debt, delayed filings due to required accounting review by GP, CEO and CFO departures, stopped distributions to shareholders, defaulted on covenants
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Risks
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Debt
Covenants: Net Leverage of 5.5 to 1 in 2018, 5:1 in 2019 and 4.5:1 in 2020... and fixed charge ratio is 1x in 2018 and 1.1x in 2019
At Dec 2017, $160.9M on revolving credit facility and $175M at 7.875% due 2021 senior notes
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"Significant" changes in senior management... CEO and CFO retired/resigned in May 2017... replacement CEO then resigned in March 2018, now new CEO in place.
Legal risks: Investor lawsuit #1... was dismissed but now appealing.... investor lawsuit #2 and #2 = still outstanding
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Industry
Sales of cemetery products are subject to state regulations. Regulations require establishment of two trusts: merchandise and perpetual care trust to ensure that they will meet their future obligations.
Other two publicly traded death care companies = Service Corporation International and Carriage Services, Inc. "generally do not compete with them due to geographic differences"
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Management
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Insiders buying, no selling.