Is StoneMor Partners L.P. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does StoneMor Partners L.P. (STON) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell StoneMor's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at StoneMor's key statistics:

STON Total Return Price data. Source: YCharts.

Source: YCharts. *Period begins at end of Q4 2010.

STON Return on Equity (TTM) data. Source: YCharts.

Source: YCharts. *Period begins at end of Q4 2010.

How we got here and where we're going
Things don't look good for StoneMor in its second go, as the cemetery and funeral home operator's lost two of the passing grades earned in its prior assessment to finish with only one out of eight possible passing grades. StoneMor fell only a little short of passing on revenue growth, but the real problem appears to lie in the company's dwindling bottom line, which has hurt it on multiple fronts today. The company's dividend payouts, which are required to remain elevated due to its master limited partnership structure, have exceeded free cash flow levels over the past several years, but MLP stocks earn a special exemption from this metric. Going forward, will StoneMor be able to restore its earnings, or will investors find their gains planted six feet firmly under the ground?

StoneMor posted better-than-expected revenue and earnings per share for its fourth quarter, a strength primarily driven by contributions from acquisitions made in 2012 and 2013. StoneMor completed two acquisitions -- Seawinds Funeral Homes in Florida and Forest Lawn Cemetery in Richmond -- last year, part of its ongoing commitment to broaden its holdings of funeral homes and cemeteries near medium-size cities. StoneMor's arrangement with the Archdiocese of Philadelphia should also help it to boost revenue growth over the next few quarters.

StoneMor also issued $175 million worth of debt last year that's due in 2021, which should result in interest savings of about $1.6 million per year. It also continues to tap low-cost funding from the capital markets, as it recently offered another 2,000,000 common units for limited partner interest (essentially shares, MLP style) at a price of $24.45 per unit. The company currently boasts a backlog of up to $482.6 million, an amount equal to about two years of revenue.

Fool contributor Mark Lin notes that the funeral industry growth has been rather, um, motionless over the past decade, as the number of deaths never fell by more than 3% nor rose more than 1.5% year over year during that time in the U.S. According to the Centers for Disease Control and Prevention and the Census Bureau, U.S. deaths are projected to grow by 1.5% annually into the future. Additionally, the proportion of Americans 60 or older is expected to increase from 18.5% to 25% of the populace by 2030. However, StoneMor's strongest competition continues to come from Service Corporation International (SCI -0.49%), which has a presence in more than 43 states. Service Corp.'s acquisition of Stewart Enterprises last year helped the company leverage better economies of scale and improve its purchasing power. Investors might also want to keep in mind that Service Corp.'s shares have quintupled in the past five years, compared to a far more modest double (and this happened by 2011) in StoneMor's stock:

SCI data. Source: YCharts.

Despite (or perhaps because) of this rivalry, StoneMor recently inked definitive agreements with Service Corp. to acquire nine funeral homes, 12 cemeteries, and two crematories spread across Florida, Pennsylvania, North Carolina, and Virginia for a total of $53.8 million in cash. These cemeteries perform over 3,500 interments, and the funeral homes perform around 1,900 calls per year, which should give StoneMor's revenue growth a little boost. The combined cemetery inventories add up to nearly 76,000 developed spaces, 2,400 lawn crypts, 4,200 constructed mausoleum crypts, and 4,400 constructed niches, which are all unsold.

Putting the pieces together
Today, StoneMor has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.