CTAS Cintas Corporation

A leading information management company, Iron Mountain Inc. (IRM) recently announced its intention to sell key assets of its digital division including archiving, eDiscovery and online backup to Autonomy Corporation plc for $380 million in cash.

The transaction is subject to regulatory review and customary closing conditions and is expected to close within 45 to 60 days.

However, Iron Mountain will retain its software escrow business, which is currently a part of its Worldwide Digital Business segment and other technology services such as its Digital Record Centers for Images and Medical Images.

The divestiture is a part of Iron Mountain’s comprehensive strategic plan, which was announced on April 19, 2011. Iron Mountain was forced to undertake a strategic review regarding the digital business, which has recently been up against a number of challenges.

We believe the divestiture of the under performing digital assets will help Iron Mountain focus on its core business.

Further, Iron Mountain has undertaken a number of initiatives to enhance stockholders’ value going forward. This includes sustaining its dominant position in the domestic market and significantly improving its international portfolio.

Iron Mountain expects to return approximately $2.2 billion to shareholders by 2013, through share repurchases and dividends. The company also formed a special committee to evaluate financing, capital and tax strategies including its plan of converting into a Real Estate Investment Trust (REIT).

By executing on its comprehensive strategic plan, Iron Mountain expects to achieve after-tax ROIC of 11.0% in 2013, up from 7.7% in 2010. Iron Mountain expects to achieve adjusted OIBDA margin of 32.0%, while lowering its capital spending to approximately 6.0% of revenue by 2013.

First Quarter Recap

Iron Mountain reported earnings per share (EPS) of 26 cents in the first quarter of fiscal 2011, missing the Zacks Consensus Estimate by a penny.

Revenues increased 3.0% year over year to $799.0 million, surpassing the Zacks Consensus Estimate of $794.0 million. Revenues were primarily aided by an internal growth rate of 1.0%. Acquisitions and foreign currency fluctuations contributed 1.0% to revenue growth in the quarter.

Iron Mountain projects revenue growth in the range of 3.0% to 5.0% (previous guidance 2.0% to 4.0%) for full-year 2011, primarily based on internal revenue growth of 0-2%.

The company forecasts adjusted OIBDA in the range of negative 1.0% to positive 2.0% for fiscal 2011. Iron Mountain expects earnings per share in the range of $1.16 to $1.24, reflecting a year-over-year growth of 1.0% to 8.0% (previous guidance $1.21 to $1.30).

The company expects capital expenditure of $235.0 million (previous guidance $245.0 million) and free cash flow in the range of $375 million to $410 million for fiscal 2011.

Recommendation

We maintain our Neutral recommendation on a long-term basis (6-12 months) due to weak internal growth and volatile foreign exchange rates, partially offset by Iron Mountain’s promising product portfolio and strong market share.

Iron Mountain faces stiff competition from Anacomp Inc., Cintas Corporation (CTAS) and privately held SOURCECORP, Inc.

Iron Mountain holds a Zacks #3 Rank, which implies a short-term 'Hold' rating (for the next 1-3 months).

 
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