Is StoneMor a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy StoneMor (NYSE: STON  ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Although it may be too small for him to literally buy, does StoneMor meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine StoneMor's earnings history:

Source: S&P Capital IQ.

StoneMor doesn't appear profitable when you look at its net income; however, the company actually generates consistent free cash flow because it so frequently receives payment in advance of providing its services.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt-to-equity ratio, because that will skew your calculations and make the company look much more efficient than it is.

StoreMor doesn't technically produce a return on equity, because it has negative earnings, but we can estimate that over the past 12 months it generated a solid 15% cash flow return on average equity while employing a debt-to-equity ratio of 90%.

3. Management
CEO Lawrence Miller has been running everyone's favorite cemetery partnership since it was founded in 2004. He has decades of experience at large cemetery holding companies.

4. Business
Unless science discovers a cure for death, the cemetery business isn't particularly susceptible to technological disruption.

The Foolish conclusion
So is StoneMor a Buffett stock? It could very well be. The company exhibits several of the quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward business.

If you're looking for another intriguing stock idea, check out The Motley Fool's Top Stock for 2012, which details a stock our chief investment officer picked to beat the market. I invite you to download this special report for a limited time by clicking here -- it's free.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of StoneMor Partners. Motley Fool newsletter services have recommended buying shares of StoneMor Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2012, at 1:10 PM, Merlin186 wrote:

    Ilan, I enjoyed reading your article on STON. The company does have some great attributes, that is why I bought into STON. Death is not escapable. Not sure if it is a Buffett stock, but it never hurts to look at it through several of his metrics. One of Buffett's many metrics is price-to-book, he generally doesn't pay more than 1.1. So in that light, it would be considered overvalued. But the business area and the dividend sure make STON very palatable. Many thanks!

  • Report this Comment On March 05, 2012, at 2:05 PM, rockymtn9 wrote:

    This is laughable. Stonemor is a pyramid scheme piece of garbage. Their management roll up low quality cemeteries and bribe shareholders by paying fat dividends funded by stock issuance. Buffett wouldn't touch this promotion with a ten foot pole.

  • Report this Comment On March 05, 2012, at 7:33 PM, jlfmo wrote:

    Yikes, this article is a joke. Stonemor hasn't covered its distributions out of operating cash flow (much less free cash flow) since 2007. It's EBITDA barely covers its interest expense, and the company is over 8x net debt/ebitda levered. Meanwhile, the company continues to raise equity to cover the distribution. There's a term for that, which you may know. Unfortunately people tend to buy into this theory of "distributable free cash flow" which counts future hopeful collections of ARs and future distributions out of the company's trusts, which never seem to happen into current cash flow today. We're still hearing excuses from management about why they haven't seen collection from their 2007 acquisitions. Meanwhile, the company continues to re-lever and once again will soon need to issue new equity, and will once again dilute unit holders (otherwise, they'll have to cut the distribution) Lets also not forget that most of STON's management team were key players at the Loewen Group, which went bankrupt pursuing the same "pre-need" strategy. Beware, this distribution is not safe.

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