StoneMor Partners L.P. (NYSE: STON)
StoneMor Partners shareholders were laid to rest on Friday, as the stock lost over 44% of its value, settling the final trade at $13.74, a decease of $11.08 on the day. STON stock imploded after the company announced that it will be cutting its quarterly distribution by approximately 50% in order to preserve capital as they work to repair their internal infrastructure.
Volume in STON stock exploded by over 2000% from its average trading day, trading over 4.1 million shares compared to its previous daily average of 192K shares per day. This is a clear indication that investors were not happy with the news and were quick to bury the stock.
StoneMor Partners Shouldn’t Be Buried Just Yet
With STON stock getting buried, it is apropos that StoneMor is the owner and operator of 105 funeral homes and 317 cemeteries spread across twenty states and Puerto Rico. STON is the only publicly traded death care company, selling products and services on both a pre-need and an at-need basis. Products include burial lots, crypts, caskets, memorials and burial vaults. STON also markets the associated services that provide installation and merchandise support.
Although STON shareholders exited en masse on Friday, the company is actually far from dead, but management does need to get their act together quickly.
What Exactly Caused The Death Spiral?
Even with STON not being formally declared deceased, there is reason for concern. Back in August of this year, STON management discussed the company’s strategy to focus their efforts toward rebuilding a high quality salesforce and promoting a sales program that is aimed at reducing the turnover in its sales team. Part of the strategy focused on eliminating a large number of existing salesforce professionals that the company determined to be under performing.
As a consequence of the reduction, sales at STON – especially on the pre-need side of the business model – suffered, causing the company to come up short on previously provided guidance.
Fast forward three months later and STON management is still trying to compensate for the reduction in salesforce. In fact, it’s almost as though STON management is simply repeating the same weaknesses that they communicated during the previous quarterly call in April.
Similar to the previous guidance, management is making excuses as to why the company failed to execute, even marginally, on the new strategy. The statement made on 10/27/16 might be a precursor of additional bad news on November 9th, when the company is expected to report their 3Q results.
Will Management Execute The Strategy By EOY 2016?
Based on the statement released by the company on Thursday, it is almost a given that the quarterly results will not be good. Perhaps management wanted to soften the blow by discussing the distribution cut early. However, as poorly as the news was received on the distribution front, STON management still needs to address why they can’t execute on the focus to build a professional and dependable salesforce.
In its statement, STONE reiterated the focus of increasing its salesforce, now intent on hiring a national recruiting firm to assist in the process. STON has further increased its in-house recruiting efforts and hired a new Vice-President of Sales, all of which the company expects will yield positive improvements in the months ahead. But, these efforts are now six months in process, and the company appears to be no closer to accomplishing even a small fraction of their initiative.
More disturbing, though, might be that the company has made reference to enhancing liquidity and embarking on a cost savings plan. Those are words not generally used by optimistic and growing companies. The cut in distribution, combined with the cost cutting initiatives, is expected to save over $7 million dollars annually and enhance liquidity by over $12 million dollars. Perhaps the word annually is what spooked investors, as the term might lead them to believe that the distribution cut might not necessarily be a short-term measure.
Is The Distribution Safe?
Investors received additional insight as to how the company is performing, intuitively reading between the lines of what management stated publicly on 10/27/16.
According to Robert B. Hellman, Jr., Lead Director of the Board of Directors and Chairman of the General Partner, commented on the situation by stating, “The General Partner strongly believes that this reduction, while disappointing, will protect and position the Partnership to achieve our longer-term expectations for future growth of the business. During this temporary transition period, the General Partner remains committed to providing necessary resources and support to the Partnership, including the funding of acquisitions that are immediately cash accretive, while it strengthens its sales force.”
Additionally, management added, “While we are striving to accelerate the time line of hiring and training additional sales talent, we estimate that this could take up to an additional six to nine months to attain the level of productivity we expect. We intend to provide monthly updates on the sales team expansion for greater visibility on our progress to the levels we are targeting. At that time, we will reassess the distribution and will look to reset it at the appropriate level.”
Essentially, management will reassess the distribution level in 6-9 months and determine at that time an appropriate level available to distribute. The one thing that the market can’t stand is uncertainty, and management provided a plate load in their statement.
Will STON Rise From The Ashes?
With the level of uncertainty now surrounding the stock, it might be best for investors to look elsewhere to put fresh capital. Bailing on the stock after a single day plunge of over 40% might be premature; selling into strength at higher levels might be a better option, assuming the stock gets a bounce from the oversold territory.
Expectations of a strong 3Q might very well be wishful thinking, and there is no assurance that a potentially bad quarter is already baked into the decline. One thing is sure, the at-need business will be around for a while. But, if STON cannot capitalize on pre-need sales and service, the stock may be fairly valued at these levels.
Once STON successfully builds its salesforce and begins to accelerate sales, perhaps the company can once again return to growth mode and restore the distribution to historical levels. Until then, investors might be wise to embalm STON for the time being and revisit the stock after the next couple of quarters.
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