IRM: Macquarie reiterates Outperform, sees 75% upside by 2010

I continue to like the IRM story. Recent weakness makes the stock more attractive to me in the longer term.

Macquarie:Kevin McVeigh sees 75% upside to Iron Mountain by 2012 and does not think this is a buggy whip story. And, you can buy it cheaper than Buffett did.

We are reiterating our Outperform rating based on what we consider to be an attractive opportunity to invest in the IRM stock, which is down 31% since Sep-09, underperforming S&P 500 by 3600bps. This level is only modestly above its credit crisis low of $17.07 reached in Mar-09. We believe the recent weakness creates an attractive entry point in front of its October 5th investor day. We also see meaningful upside to our $35 price target and expect the shares to appreciate driven by what we expect will be solid preliminary 2011 internal revenue growth guidance at investor day, likely in the low-to-mid-single digit range.

Transformation has driven shift in capital structure. We continue to be impressed with how well the management team, leveraging its highly recurring internal revenue growth, has transformed Iron Mountain into a US$3 billion global leader in information protection and storage services. In our view, this transformation coupled with an intense focus on margin expansion and capital efficiency has enabled the company to generate much better-than-expected free cash flow and positioned the company to return capital to shareholders earlier than expected. We feel even more confident based on the key takeaways below:

o Liquidity, ability to manage debt supports return of capital to shareholders;
o Share repurchase and dividend should drive multiple expansion;
o Capex as a % of revenue should decrease yielding stronger free cash flow;
o Digital (almost 10% of revenue) continues to be an area of focus.

Use recent weakness as a buying opportunity. Iron Mountain's recurring business model and healthy internal growth should drive strong EBITDA, which coupled with its focus on capital efficiency as evidenced by its lower capex guidance of US$280.0m should drive strong free cash flow of about US$327.5m (8% yield). We believe this free cash flow will enhance Iron Mountain's ability to return some of its cash through its US$150m share buyback + US$0.25 dividend.