Iron Mountain Stock: Enjoy The Quiet Flow Of Cash (NYSE:IRM)

Investing can be a fun and intellectually fulfilling endeavor, but like anything else in life, there has to be some sort of balance. For example, if one were to solely buy speculative growth stocks in a portfolio, then one may spend sleepless nights fretting over what they will do in an economic shock. That’s why it pays to have what I would call “reduced stress” holdings that have proven business models and durable income streams.

This brings me to Iron Mountain (NYSE:IRM), which to me reflects those aforementioned qualities, with a large number of quiet facilities that store vast amounts of documents. As shown below, IRM is now again trading in a trough, and in this article, I highlight why now is an opportune time to add this quality pick, so let’s get started.

Why IRM?

Iron Mountain was founded by Herman Knaust, who made his first fortune by growing and marketing mushrooms. He paid $9,000 in 1936 for a depleted iron ore mine and 100 acres of land so that he could have more space to grow mushrooms.

By 1950, the market had shifted, and he transformed his space and business into the Iron Mountain that we know today. Now, IRM operates as a REIT that owns, operates, and develops storage facilities for both physical and digital records. It’s the largest provider of storage and information management services in the world with over 2,000 locations in 58 countries, serving more than 225,000 customers including 95% of the Fortune 1000 companies.

While some may be wary of the physical document storage business in an increasingly digital era, the fact remains that many laws and regulations require businesses in the finance, legal, and healthcare space to retain paper records. While digital storage is great, there is nothing like having a tangible document in front of you that is not vulnerable to erasure through a cyberattack.

Moreover, IRM is seeing impressive growth, with revenue growing by 18.5% YoY (on a constant currency basis), driven by a continued rebound in the services business (37.6% sales growth) and storage rental revenue (7.8% growth). Importantly, IRM is able to grow its bottom line in an inflationary environment, with adjusted EBITDA growing by a respectable 15.4% (constant currency), nearly keeping up with revenue growth, and with AFFO per share growing by 11.2% (lower than EBITDA growth due in part to currency effects).

Time and again, IRM has proven the durability of its storage business model. That’s because companies will likely cut down on extravagances, staff, and their real estate footprint before even considering cutting back on business critical document storage. In addition, the CEO of IRM years ago stated that he “prays for inflation”. It appears that he has gotten his wish. Management elaborated on how it’s well-positioned with pricing actions during the Q&A session of the recent conference call:

Q: Can you provide an update on how much in pricing increases are flowing through in response to the current inflationary environment and how much flexibility you have to reflect up change revenue management conditions as the year progresses?

A: Thanks for the question. The team is doing very, very well with respect to revenue management. You would have seen that our organic storage rental revenue growth on an organic basis was up over 8% in the quarter. That marked a nice acceleration even from the higher levels in the first quarter. And in our Global RIM business that was over 6% on that metric. So volume, as you would have seen on an organic basis – in total is up about 2%, but on an organic basis is very consistent with our expectations of being just slightly up, so about 50 basis points. So what you’re seeing is a very strong contribution from revenue management coming through.

And I’ll just add on to the second part of your question and note that we are continuing to see incremental opportunities for pricing. And in fact, we will be seeing us move forward with additional pricing actions later in the third quarter that will fully benefit us as we move through the year and then give us a little bit of an incremental lift next year. So those are just in light of what’s going on in the economic activity and the fact that our existing revenue management program has been so well received, we see the opportunity to continue to move higher. So you will see that going forward.

In addition, like how the founder of IRM originally transformed the company, IRM continues to transition well into the data center field, with 30% revenue growth in its latest reported quarter, and is on track to achieve new and expansion leasing projection of 130 megawatts for the full year. This is supported by a healthy balance sheet with $1.8 billion of liquidity and a safe net lease adjusted leverage of 5.4x and 82% fixed rate debt.

Importantly, the share price weakness has pushed IRM’s dividend yield to 5.2%, and the dividend is well covered at an 83% payout ratio, based on normalized FFO per share of $0.74 during the second quarter. I find value in IRM at the current price of $47 with a forward P/FFO of 16.1, considering its durable revenue stream combined with strong growth.

Analysts estimate FFO/share growing at a respectable 10-12% annual clip over the next 2 years, and have a consensus Buy rating with an average price target of $61.33, implying potential double digit total returns over the next 1-2 years.

Investor Takeaway

Investors looking for a proven company with great future prospects and that pays a solid dividend should take a hard look at Iron Mountain. It’s set to continue benefitting from inflation and its business evolution is bearing fruit. Given the recent share price weakness, IRM is set up for potentially very rewarding returns for shareholders going forward.