August 31, 2004
Fellow Fool contributor Tim Beyers has a smart investment philosophy. He states flatly that he won't invest in businesses that he doesn't understand. With that approach in mind, here's a company I've come across that is easy to grasp: Iron Mountain (NYSE: IRM ) . Its tidy business model just might be worth investing in, too.
Iron Mountain stores companies' paper documents. It's that simple. The company has found a profitable niche helping companies by boxing and stowing their mounting piles of paper records in its giant warehouses and underground bunkers. Thanks to litigation and stricter record-keeping compliance requirements, such as the Sarbanes-Oxley Act, there is no shortage of paper that companies have to hold on to. Of the $445 million in revenue last quarter, 58% came from its "box business."
Here's the part I really like. Iron Mountain has two-thirds of the U.S. outsourced document storage market and about half the global market. That kind of dominant position gives it pricing power and, with corporate documents typically kept for seven years, predictable revenues and operating cash flows. Once corporate customers sign on with Iron Mountain, they tend not to leave. Even better, once a customer places paper records in storage, Iron Mountain gets recurring fees without incurring additional labor, marketing, or major capital costs.
The box business drives service-related fees -- such as when records are retrieved or shredded. Higher-margin services represent another 29% of revenue. Iron Mountain is adding another leg to its business by developing an email and digital archiving operation.
No company is perfect. An aggressive roll-up acquisition campaign over the past five years leaves Iron Mountain with a pile of debt. To say that its balance sheet is stretched, with a debt-to-equity ratio of 0.7, is probably an understatement. But Iron Mountain says that its goals of consolidating the storage market are over, and it has turned its attention to trimming and improving its balance sheet, growing its margins, and cranking up free cash flows.
So, with Iron Mountain shifting gears, the stock's fundamentals could dramatically improve. Unloading debt will dampen risk. Posting positive earnings and free cash flow will expand Iron Mountain's fan base. If management can start to do both, then Iron Mountain will be even easier to understand -- and harder to pass up.
Fool contributor Ben McClure hails from the Great White North. Ben doesn't own any shares mentioned here.