I recently noted that Warren Buffet has increased his position in Iron Mountain Inc. I’ve been following IRM for a number of years as the business model seems very compelling. I also happen to believe it’s a well run business. Usually when we think of Buffet-style investments we think of wide moats and high barriers to entry. While it’s beneficial to follow a guru holding, it’s imperative that we draw our own conclusions regarding any potential investment.
Iron Mountain Incorporated (IMI) provides information protection and storage services. These services can be divided into three service categories: records management services, data protection and recovery services, and information destruction services. The Company offers both physical services and technology solutions in each of these categories. Media formats can be divided into physical and electronic records. Physical records include paper documents, as well as all other non-electronic media such as microfilm and microfiche, master audio and videotapes, film, X-rays and blueprints. Electronic records include email and various forms of magnetic media such as computer tapes and hard drives and optical disks. IMI derives most of its revenues from the storage of paper documents and storage-related services.
First, let’s review the industry in which it operates. The industry of data storage, archiving, etc. is an attractive one due to its long-term growth potential. As you may know, since the implementation of new regulations across many sectors such as finance (Sarbanes Oxley) and healthcare (Health Insurance Portability and Accountability Act) it has become essential for secure record-keeping and disaster recovery. The participants face some high barriers to entry making it attractive to incumbent players.
I can very much understand what an investor such as Buffet sees in this opportunity. The moat around Iron Mountain appears to be quite wide. The business model is utility-like in that it’s a service companies can’t do without. To be able to outsource this function is valuable. The balance sheet reveals high levels of capital intensity. It takes a great deal of infrastructure to be able to securely archive this amount of information. Contrary to what one might believe, companies that have high amounts of fixed capital are not necessarily less unattractive. In fact, it may be a large competitive advantage. However, the high amount of capital IRM carries a significant debt load, which means that return on total capital is very low. That being said, cash flow is more than capable of servicing that debt.
- Stable and growing revenue base.
- High barriers to entry.
- Consistent free cash flow generation.
- Significant debt levels.
Book Value / Share
Debt / Equity
Return on Equity
My concerns regarding IRM as a potential investment are twofold. First, the business is generating low returns on capital – including high debt levels. Second, valuation – trading at over 17X ttm free cash.