Iron Mountain (IRM) is one of the highest-yielding
stocks in the S&P 500 and offers investors compelling total return
potential. It is structured as a real estate investment trust (or REIT) and is
undergoing a transition from a physical data storage company into a digital
data storage company.
Currently, the market is pricing it as a struggling company
with a declining core business, but we believe that the market is missing the
growth story in its investments in data storage, government contracts, and
international expansion. While investors wait for market sentiment to turn, they
get paid a fully-covered 7.8% dividend that is expected to grow at an average
rate of 4% per year.
Recent Earnings Report
In its second quarter, Iron Mountain reported revenue growth
of 0.6% despite foreign currency exchange headwinds (underlying organic growth
rate was 0.7%). However, expenses outpaced revenue growth by increasing 1.7%,
led by cost of sales growth of 3%. Operating income and adjusted earnings per
share declined 4.1% and 23.4%, respectively, year over year. On the positive
side, EBITDA margins expanded from Q1, improving to 32.9% from 30.8% in Q1
while organic storage rental revenue growth was 2.4% on total storage volume
growth (excluding acquisitions) of 2%.
The company needs to continue significantly improving its
EBITDA margin in order to meet guidance and get back on track to meet its
ambitious growth and deleveraging goals. Something that will likely help them
is that a brand-new data center just opened, and several others will be opening
in the near future.
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