Can Iron Mountain Pivot To Compete With Data-Center REITs?

As businesses increasingly rely on the cloud for document storage, companies like Iron Mountain NYSE: IRM are capitalizing on the shift away from paper.

A couple of years ago, when I was moving out of a house, I had a junk hauler remove some items I no longer needed, including a metal file cabinet. Fortunately, he was able to sell it to a scrap metal recycler. However, he told me a big chunk of his business consisted of people ditching unwanted file cabinets. Second-hand stores won’t even take them, as nobody wants to buy them anymore.

Those old cabinets are still found in office settings, but less frequently, and taking up less real estate every year. 

Enter Iron Mountain, a Boston-based company that provides records management, data protection and information destruction services. You may have seen their trucks, which pick up shredding jobs from business customers. They also pick up papers to store securely in temperature-controlled warehouses. That’s a good solution for papers such as medical or legal records that need to be kept for regulatory or other reasons, yet take up a lot of space in offices. 

However, as companies move away from paper, Iron Mountain has to pivot. One obvious direction is data storage. The company has already made a name for itself as a document and data security specialist, so the transition makes intuitive sense.

That involves a real-estate play, as the company begins to find space for data centers. 

At this time, Wall Street mainly views Iron Mountain as a document shredder and storage company. 

Companies viewed more as data-center specialists include Equinix NASDAQ: EQIX, CoreSite Realty NYSE: COR and Digital Realty Trust NYSE: DLR.

Those three companies are all structured as real estate investment trusts, meaning they have some advantages to investors in the form of pass-through income and pass-through tax deduction. 

Here’s how all those companies stack up when it comes to their three-year annualized revenue growth rates:

Iron Mountain: 2.55%

Equinix: 11.15%

CoreSite Realty: 7.99%

Digital Realty Trust: 2.55

As you see, a paper storage company can’t really keep pace with the revenue growth of companies whose specialty is data storage, even when structured as real-estate plays. 

Can Iron Mountain turn itself around and make paper storage a smaller piece of its business, and grow the data piece? 

It certainly has an advantage when it comes to brand awareness, with all those trucks driving around cities. 

Customer stickiness is also a benefit. In a recent interview with Wall Street Transcript, CEO William Meaney said 950 of “the world’s largest companies are our customers, and our customer churn is less than 2% a year.”

Iron Mountain shares are up 17.09% in the past three months, 53.62% year-to-date and 68.57% over the past 12 months. That three-month return remains strong despite the stock’s current pullback.

The stock is forming a flat base since retreating from its June 9 high of $47.34. So far, it’s corrected 11% from peak to trough. The base could also be construed as a cup, as it’s also taking that shape. As long as the correction remains under 15%, you can also characterize it as a flat base. At this time, the buy point is that prior high of $47.34.

On a technical basis, the stock is setting up nicely for a new run-up. However, would-be investors should be aware that Iron Mountain reports its second-quarter on August 5, with analysts expecting earnings of $0.64 per share on revenue of $1.09 billion. Those would represent gains on both the top-and-bottom lines. 

However, the company has a history of missing Wall Street views. That hasn’t hurt the stock price recently, however. 

Earnings grew in each of the past four years, with the three-year annualized net income growth rate being 26.30%. 

Shares closed Thursday at $44.04, up $0.30 or 0.69%. 

Analysts’ current price target for Iron Mountain is $33, which represents a 25% downside. That’s another reason for potential investors to sit tight until the next earnings report.