Description

Iron Mountain was written up back in 2019 by icebreaker25 as a short, I thought it was an interesting pitch back then and I still think many of the points in that thesis still hold true today. For more background on the company, I would direct you to their report, but in summary Iron Mountain is the leader in physical document storage. It was founded back in 1951 during the Cold War to house sensitive information and that is still largely what they specialize in today (~50-60% of revenue). They have about 225k customers (~95% of the Fortune 1000) and 740 million cubic feet of global storage volume across 1,400 facilities. They also offer several services around their storage activities such as handling of records (i.e., adding and removing boxes to/from their storage facilities) or destruction / shredding services. They also over the last 1-2 years have been more aggressively entering both the Data Center business and Digital Solutions business (i.e., scanning / imaging of documents into digital format for their clients to access).

My thesis is relatively simple: I think this is a business clearly caught in the crosshairs of enterprise digitization and this company represents an asymmetric opportunity to short a melting ice cube trading at all-time highs where I believe the market has a fundamental misunderstanding of IRM’s near and long-term growth and margin prospects. My base case downside is about 35% with and attractive risk reward of an over 3:1 downside / upside skew. (Not to mention the benefit IRM has seen from the value to growth rotation over last few months, not worth getting into, but worth noting that technical factor)

Key Investment Highlights:

1 . I think the secular decline of the core storage business (i.e. physical doc storage) is still in the early innings and I think we will begin to see volume declines start to accelerate

·        Customers in core storage are kicking the can down the road – no one wants to be the person at a law firm or financial institution to destroy a document where the SEC can come knocking for it one day and fine them if they don’t have them on hand

·        Every customer I spoke to planned on cutting their spend by >50% in the next 2-3 years – I think with the proliferation of digital data management services, it will become much easier for firms to cut back spend and transfer their physical data to these platforms. I would note IRM has an offering for this, but customers I spoke with feel that other alternatives are cheaper and have more functionality to meet their needs

·        As a leading indicator of this, organic customer volume adds have continued to come down over the last year / document destruction continues to accelerate, which I view as a cannibalization of the existing storage business

2. Offset of volume decreases with price increase is unlikely to continue, which I think will put pressure on margins looking forward

·         Management over the last few years has emphasized price over volume with consistent price increases of a few percent a year

·         Increasing competition from new digital alternatives limits IRM’s cross sell opportunities as well as pricing in core storage business

·         Customers I spoke with indicated in some instances IRM is 2-3x more expensive than some private competitors

·         Pricing decrementals are severe likely accelerating margin compression over time

3. Cost Cuts from Corporate Restructuring Are Largely in the Rear-View

·         Project Summit was a restructuring program that IRM implemented that drove $375M in EBITDA benefit vs. $200M of initial expectations – the company only expects $50M in Y/Y benefit in 2022

·         As a result, EBITDA margins are at all time highs due to the coupling effect of the price increases and cost cuts

·        The sell side is modelling steady margin expansion through 2025, which I believe is unlikely and think continued upside needs to come from the services business or data centers, which in my view is unlikely to truly move the needle

·         In a more punitive scenario where management does have to aggressively cut costs, I think margins could have to come down upwards of 300bps

4. Balance Sheet gives IRM limited financial flexibility to execute on strategy that has worked for them over last few years

·         Leverage at IRM has continued to grind higher as they in my view continue to invest aggressively in new growth areas like data centers

·         Bulls believe the current peak multiple of ~16x EBITDA adequately considers balance sheet, structural worries, and potential dividend risk. I disagree.

·        PF for the ITRenew acquisition back in December, leverage sits at around 6x, which I believe gives little flexibility for additional growth investment, which has been a core part of the strategy and a large part of why the stock as continued to work

·         I don’t think they have to cut the dividend near term – but it is certainly a possibility in more punitive growth / margin scenarios

Valuation: Applying ~12x 2022E core storage business EBITDA (roughly where the business traded pre-DC) and 15x the Data Center business EBITDA (2-3 turn discount to comps due to smaller scale, balance sheet risk, lower margins) gets me to a share price of about $30, which represents roughly 35% downside. The stock has already blown through what I would believe to be an upside case taking a 1 turn discount to the peak storage multiple due to higher leverage, increased execution risk, and rising rates, and then an M&A precedent multiple for the data center business similar to what we have seen over last few months (i.e. KKR/GIC -> CyrusOne) then we are looking at a roughly $52 stock vs. the $55 where it trades today.

Bulls on this here I think are willing to potentially underwrite higher future growth areas such as consumer (IRM quotes a $35bn TAM) and the mix shift to hyperscale DC contracts which have more contract duration and stability.

Risks:

·         Storage retention proves stickier than expected, driving more durable volume growth over time

·         Customers less price sensitive than anticipated

·         Market / rate environment reverse current course

·         Short interest elevated (~8%)

·         Shift to digital proves more successful than I expect

I do not hold a position / position with the company - please do your own research.

Catalyst

- Earnings declines

- Interest rate increases

- Potential dividend risk / cut