A leading provider of information protection and storage services, Iron Mountain Inc. (IRM) is currently a Zacks Rank #3 stock, a short-term Hold with a long-term Neutral recommendation. Shares of Iron Mountain are currently trading at a discount to the industry average and the S&P 500.
Second Quarter Highlights
Iron Mountain reported strong second quarter 2010 results on July 29. Adjusted earnings (excluding one-time items) increased 12.0% year over year to 28 cents per share, beating the Zacks Consensus Estimate of 24 cents per share. The surprise was primarily attributable to a stronger gross margin mainly due to operating efficiencies and pricing and productivity gains.
However, revenues of $779.8 million were lower than the Zacks Consensus Estimate of $785.0 million and management’s guidance range of $785.0 million to $805.0 million. Storage revenues (55.9% of second quarter revenue) upped year over year to $435.6 million with an internal growth of 3.0%, impacted by the overall weak economic conditions that have lowered storage volume growth.
Service revenues (44.1% of second quarter revenue) climbed 4.2% year over year to $344.1 million.
Guidance for Fiscal 2010
Management reiterated its fiscal 2010 earnings outlook but lowered the high end of its revenue guidance to reflect the currency impact (strong U.S. dollar), macroeconomic weakness, especially in Europe and trends in the internal growth. This could impact near-term results.
The company reduced revenue estimates in the range of $3.12 billion to $3.16 billion for full year 2010 or 4% to 5% year-over-year growth on a reported basis. Previous projection for revenues was in the range of $3.18 billion to $3.25 billion (a 6% to 8% year-over-year growth on a reported basis). Iron Mountain maintained earnings growth rate estimates of 10.0% to 22.0% and expects earnings per share projections to remain in the range of $1.07 to $1.16.
For the third quarter of 2010, Iron Mountain expects revenues in the range of $780.0 million to $800.0 million and operating income in the range of $149.0 million to $159.0 million.
Estimate Revisions – Nil
Iron Mountain has seen no change in analysts estimates, over the past 30 days, for the third quarter or full year 2010. The current Zacks Consensus Estimate for the third quarter 2010 is a profit of 30 cents per share and is $1.12 for the full year 2010. Consequently, we see an absence of catalysts that could drive the shares higher and expect the company to report in line with the Zacks Consensus.
We believe the company’s promising product portfolio, strong market share, focused execution, impressive cash flow, substantial recurring revenues, steady margins, earnings momentum, cost savings, international expansion and proven value proposition will drive profitability in the long term.
The company has adopted an aggressive acquisition strategy to stimulate its internal growth, especially in storage and digital revenues, and has built a strong platform for future growth.
We also remain encouraged by the company’s strong cash flow. The company’s growing cash has enabled it to return value to shareholders. For fiscal 2010, Iron Mountain expects to generate free cash flow of $330 million to $360 million.
Iron Mountain has recently announced the authorization of $150 million in share repurchase program and initiated its first ever quarterly dividend of $0.0625 per share, representing an annual dividend payout of approximately $50 million (1% dividend yield), which was paid from the second quarter of 2010. As of June 30, 2010, the company has repurchased an aggregate of 2.2 million shares for a total cost of $54 million, leaving approximately $96 million available under its share repurchase program.
As long as the company continues to perform at a high level, we believe the shares can maintain their current valuation. Our Neutral rating remains unchanged at this time as near-term visibility remains cloudy.