Too Soon for a Rebound

 | Jun 10, 2013 | 1:00 PM EDT
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On Friday, Iron Mountain (IRM) fell 15% and four analysts reaffirmed their liking for the stock. I on the other hand, do not like it. However, I respect it and hold the company in high esteem. Also, I have a friend who works there.

But the stock is now a falling knife. It was down 19% last week, the worst performer in the S&P 500. And this is one knife I wouldn't try to grab in mid-flight.

Headquartered in my hometown of Boston, Iron Mountain is the leading company in corporate record management and disaster recovery, and was a pioneer in that field. In the 10 years that ended in 2007, Iron Mountain shares returned 420%, more than quintuple the return on the S&P 500.

But here we could cue the music from Bruce Springsteen's "Glory Days." The company's best times appear to be behind it. It has lost first-mover advantage. Its success attracted lots of competition, and the barriers to entry, while real, are far from insurmountable.

Last week's drop came as Iron Mountain revealed that the Internal Revenue Service is skeptical about its plan to convert to a real estate investment trust (REIT). Investors had been counting on such a conversion to lower the combined tax burden on the company and its stockholders.

If the REIT issue were the only issue, I would say to buy the stock on last week's drop. But it is not the only issue. Iron Mountain is a heavily indebted company with high valuations not justified by its recent profit growth.

Indebted? Iron Mountain has total debt equivalent to 332% of stockholders' equity. That puts it among the 5% with the highest debt loads among all U.S. publicly traded companies with a market value of $250 million or more.

High valuations? Iron Mountain shares fetch almost 28x earnings and close to 5x book value (corporate net worth per share). Such multiples should go to companies that are growing their earnings very rapidly, but Iron Mountain no longer is. The earnings growth rate for the past five years has been about 12%, which is more than respectable, but less than spectacular.

There is a high dividend yield, about 4%, but earnings don't nearly cover it. That is one reason investors were so disappointed by the REIT news.

Iron Mountain is a good company and I believe a time will come when the stock is ripe for purchase. But it won't be any time soon.

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