StoneMor Is Better Than You Think

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StoneMor (NAS: STON) may be better than you think.

In the daily noise machine of CNBC, analyst estimates, and quarterly announcements, investors are inundated with talking heads obsessing over earnings-per-share figures.

Earnings, or net income, is an accounting construction that is the basis for the price-to-earnings ratio, the most popular way of measuring how cheap or expensive a stock is.

But free cash flow -- the amount of cash a company earns on its operations minus what it spends on them -- is another, oftentimes more accurate measure of earnings that can give you an advantage.

How StoneMor stacks up                                  
If StoneMor tends to generate more free cash flow than net income, there's a good chance earnings-per-share figures understate its profitability and overstate its price tag. Conversely, if StoneMor consistently generates less free cash flow than net income, it may be less profitable and more expensive than it appears.

This graph compares StoneMor's historical net income to free cash flow. (I omitted various gains and charges such as tax deferrals, restructurings, and benefits related to stock options.)

anImage

Source: Capital IQ (a division of Standard & Poor's) and author's calculations.

As you can see, StoneMor has a tendency to produce more free cash flow than net income. This means that the standard price-to-earnings multiple investors use to judge companies may overstate its price tag.

There can be a variety of reasons to disregard such a discrepancy; for example, free cash flow can overstate earnings in businesses with volatile working capital needs, or understate earnings in high growth companies that are reinvesting capital in the business.

Alternatively, in cases where free cash flow more accurately measures earnings, such a discrepancy can indicate a company that is more -- or less -- expensive than investors realize.

Let's examine StoneMor alongside some of its peers for additional context:

Company

Price-to-Earnings Ratio

Adjusted Price-to-Free-Cash-Flow Ratio

StoneMorN/A*36.1
Service Corp (NYS: SCI) 19.413.1
Carriage Services (NYS: CSV) 11.25.4
Matthews International (NAS: MATW) 12.813.5

* Negative earnings.

On a net-income basis, StoneMor appears to stick out among these peers as the only one failing to earn a profit.

However, Stonemor tends to generate a considerable amount of free cash flow, suggesting that the company might be more profitable -- and its stock cheaper -- than many investors realize.

If you'd like to stay up to speed on the top news and analysis on StoneMor or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned. The Motley Fool owns shares of StoneMor Partners. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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