The companies that seem to interest me the most as investment material these days are big, well-known names. (I say "these days" because I've done my share of investing in somewhat obscure firms in my more active and more speculative investing past.) Every now and then, though, I run across a compelling company I've never heard of. That happened with IronMountain
In a nutshell
To understand what this company does, imagine lots of big companies and their headquarters. Think of all the human resource departments, overflowing with folders on employees and even scads of past employees. Think of the legal departments, overflowing with filing cabinets full of small and big contracts, small and big legal actions, and the like. Lots of paper, right? And as time marches on, these piles of paper become bigger and bigger, and figuring out what to do with them becomes a problem. Companies may choose to expand their office space to accommodate them, perhaps even hiring a few people to manage all these records. Or. they can outsource that task (and no, not to India). Enter Iron Mountain.
Here's how the company describes itself:
"Established in 1951, Iron Mountain is considered one of the first records management companies in the country. We've benefited from continuity of management since 1981 and have enjoyed explosive growth in revenue, customers, and markets. Today, Iron Mountain is the global leader in records and information management services. Iron Mountain currently provides services to more than 200,000 customer accounts in 82 U.S. markets and 63 international markets, operating over 800+ facilities in the United States, Canada, Europe and Latin America.. Iron Mountain offers records management services for both physical and digital media, disaster recovery support services, and consulting -- services that help businesses save money and manage risks associated with legal and regulatory compliance, protection of vital information, and business continuity challenges."
Got it? Great. Now let's look at some reasons to like this firm as a potential investment.
There's a lot to like about this company.
Growth. The company isn't exactly young, but it's not a sluggish behemoth, either. For its second quarter, Iron Mountain reported revenues up 24% over the year-earlier period to $445 million. Gross profit (excluding depreciation) advanced 24% as well, with operating income up 27% and net income up 14%. The firm has reported increased storage revenues for 62 consecutive quarters now -- an impressive 15 1/2 years.
Cash. The company has generated about $25 million in free cash flow in the first half of 2004 vs. $26 million in 2003's corresponding period.
Innovation. The firm isn't just sitting back and enjoying its storage revenues. It's developing additional income streams, such as from its services, which feature "Secure Shredding," among other things. Secure shredding is what it sounds like -- you can hire Iron Mountain to dispose of your sensitive materials safely. It has also introduced "domain name management services," helping companies manage their intellectual property.
The business model. This company's cash generation isn't based on complex technology, such as semiconductors or biotechnology. It buys and establishes warehouses and rents storage space to companies, offering additional services, as well. It charges a hefty "exit fee," too, to those who want to remove materials, which makes customers think twice about doing so. This is a "switching cost," as is the hassle involved in switching storage providers. Also, whereas some companies that serve other companies might see business slide during an economic downturn when their customers put off spending, most firms will probably continue to pay for storage in a recession.
Competitive advantages. You might think that it would be simple for a new competitor to build a warehouse and begin charging for storage. Well, it sort of is. But it's a hard feat to pull off successfully because until that competitor fills up that warehouse to a great degree, it will likely be losing money. (Renting to tenants is a tough business -- read my article "So You Want to Be a Landlord?")
The tone and candor of company reports. I can't claim that I'm very familiar with management, but I liked what I read -- such as this morsel from the firm's website's corporate governance page: "As a public company, we are also committed to building stakeholder confidence through strong corporate governance and financial transparency. Iron Mountain governance is guided by two principles: (1) invest our shareholder's money as if it were our own and (2) do what is right for our customers and employees. We believe that if we do these things well, and continue to communicate openly and candidly, our shareholders will benefit greatly."
The valuation. Well, with a price-to-earnings (P/E) ratio in the 40s, this doesn't look like a cheap stock. Still, the firm is growing briskly, and it has a sturdy position in a sturdy industry, so that can be worth a bit of a premium, at least. Long-term investors might be willing to buy in at the current price, though if you simply add the company to your watch list, you may be able to take advantage of a price dip one day. (For now, I'm leaving it on my watch list, though I may kick myself for that years from now.)
The company it keeps. A little digging online revealed that I'm not the only one interested in this company. One major shareholder has been none other than Warren Buffett's company, Berkshire Hathaway
Of course, every silver lining has a cloud, right? Here are some concerns about the firm.
To begin with, there's debt. The firm owed $1.5 billion at the end of 2001 and owes $2.2 billion as of June 2004. Seeing debt levels rise isn't a great thing, but one should always look closer to learn more about the debt. In this case, the weighted average interest rate has fallen from 8.6% at the end of 2001 to 7.8% in June 2004. The percentage of debt that sports a fixed interest rate (which seems like a good thing, in this environment of likely increasing rates) has risen to 95% from 85% a year ago.
Then there are acquisitions. The company is growing to a significant degree through acquisitions -- which isn't necessarily a bad thing. In the second quarter, it acquired a full 13 firms, spending $106 million to do so. This is a major reason for the company's debt. If the acquisitions are smart ones, effectively managed, they can boost the company's top and bottom lines. If not, they can represent wastes of money. Regardless, I don't see this as a major concern. If Iron Mountain suddenly needed to generate more income and pay down its debt, it could easily do so by reining in the acquisitions.
And let's not forget other risk factors. The company itself outlined a bunch of risks in its recent earnings report:
- "Changes in customer preferences and demand for the company's services
- "Changes in the price for the company's services relative to the cost of providing such services
- "The cost and availability of financing for contemplated growth
- "The company's ability or inability to complete acquisitions on satisfactory terms and to integrate acquired companies efficiently
- "In the various digital businesses in which the company is engaged, capital and technical requirements will be beyond the company's means, markets for the company's services will be less robust than anticipated, or competition will be more intense than anticipated
- "The possibility that business partners upon which the company depends for technical assistance or management and acquisition expertise outside the United States will not perform as anticipated
- "Changes in the political and economic environments in the countries in which the company's international subsidiaries operate"
So there you have it -- an introduction to an interesting company you may want to keep an eye on. You're invited to discuss it on our Iron Mountain discussion board. (Try our entire discussion board community for free for 30 days!)
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Selena Maranjian needs to either throw away a lot of old files or look into using Iron Mountain 's services. She owns shares of Berkshire Hathaway. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.