Iron Mountain: A Solid Defensive Stock

Includes: CTAS, IRM
by: The Wall Street Transcript

The Wall Street Transcript recently interviewed Kevin D. McVeigh, Vice President at Credit Suisse First Boston Corp. covering business and professional services. Key excerpts, including his outlook for Iron Mountain, Inc. (NYSE:IRM), follow:

TWST: Are investors doing anything in this space?

Mr. McVeigh: It varies. I think some investors have started to do work on some of the earlier cycle names, but they are looking for stabilization in GDP. I would also add that I think a good defensive name to own right now out of staffing is Iron Mountain. It is an outperform-rated stock with a $34 price target.

The reason we like it is its predictable business model. I do not believe anything is recession-proof, but the company's recurring revenue stream and high client retention rates really work well in this type of macro environment. This is one of the names that we are still modeling for modest EBITDA growth in 2009 even in the current macro environment and with flattish earnings, which is a reflection of the predictability of the model.

TWST: So there are some ways to make progress here even in a tough environment?

Mr. McVeigh: Yes, in terms of Iron Mountain, we like the recurring revenue stream. The company tends to sign multi-year contracts, which is driven by compliance. It is the type of demand that really should not slow in a tough macro environment. We think it is a good name to own at this point in the cycle.

TWST: I guess compliance isn't going to go away.

Mr. McVeigh: No. I often think of it as filing a 10-K, something that you need to comply with, regardless of the economy.

TWST: Where are Iron Mountain's growth opportunities?

Mr. McVeigh: They have both domestic and international growth opportunities. Penetration rates tend to be low in both regions. What is unique about the model is that you get a fair amount of internal growth from its existing customers. Every year existing customers tend to generate higher levels of storage activity. If you layer in new sales opportunities and price increases, you get a model that has been growing 7% to 9% internally on an annual basis for a long time. We don't expect that to change. One caveat is in 2009, the company reduced its internal growth target to 5% to 7%, but the 200 basis point reduction was due to a reduction in commodities in one of the less predictable business lines.

TWST: What commodity costs factor in here?

Mr. McVeigh: One part of Iron Mountain's business is confidential destruction, where boxes are destroyed and the company sells the byproduct. Iron Mountain also provides another service where they contract with companies to remove all the sensitive data that needs to be shredded in a secure environment, such as confidential documents. With this too, the byproduct is sold off. Given the runoff in commodity costs, recycled paper prices have been under pressure. A smaller portion of the 200 basis point swing is related to fuel surcharges that are no longer passed along.

TWST: Something one wouldn't anticipate in that kind of business.

Mr. McVeigh: It is a small part of the business, but given the significant decline in recycled paper, it impacted them in the third and fourth quarter. To put this in context, as you progressed through 2009, paper prices declined from $210 per ton to the $85, $90 range, a really significant decline.

TWST: So a profit center disappeared on them?

Mr. McVeigh: Correct, but I think it illustrates the resiliency of the model. Iron Mountain was able to maintain its EBITDA target in 2009 against the backdrop of that business running off significantly. Overall, the confidential destruction business is approximately $250 million; embedded in that is about a $90 million business related to the recycled paper that has been cut in half, a business that is highly profitable with 100% margins. What I think is really compelling is that they are able to grow EBITDA against the backdrop of not only the economy, but also this highly profitable business declining.

TWST: Once we get past this economy, where are Iron Mountain's opportunities? Are they domestic or are they primarily international?

Mr. McVeigh: Both. As the compliance and regulatory environment become more complex, Iron Mountain will capture more incremental growth in the US. There is still growth in Western Europe and Eastern Europe. The company has also been investing in the Asia Pacific region. I think the Asia Pacific region is much longer term because they don't have as complex a regulatory environment as areas like the US.

TWST: Who is their big competitor?

Mr. McVeigh: Records management is a very fragmented industry. Iron Mountain is the largest player. There are two other subsidiaries of publicly traded companies that have smaller businesses. One is Cintas (NASDAQ:CTAS), which has a small document management services business, and Recall, a subsidiary of Brambles. Other than that, there is Iron Mountain, which has the dominant share in the sector.