Since the beginning of the year, shares of Equinix Inc (NASDAQ:EQIX) have dropped significantly. The company’s stock has fallen by more than 14%, faring much worse than the S&P 500’s gain of nearly 19.90% during the same period. As a result, famous investors including Ray Dalio, Ron Baron and Steven Cohen accumulated Equinix for their portfolios in the first quarter this year. Should we invest in Equinix at its current trading price? Let’s take a look.
Potential REIT conversion
Equinix Inc (NASDAQ:EQIX) is the operator of a global data center platform, connecting more than 4,000 companies to their customers and partners in 31 strategic markets around the world. The company has five main key customer categories, including Cloud and IT services, Content Providers, Enterprise, Financial Companies and Network and Mobility Services. Its revenue has been spread out similarly in four of the five customer categories. The Network category was the biggest revenue contributor, accounting for 26% of the company’s total revenue in the second quarter of 2013. Cloud & IT Services ranked second, representing 24% of the total sales. The Financial Services and the Content Providers category accounted for 21% and 20% of total sales respectively.
What I like about Equinix Inc (NASDAQ:EQIX) is its high level of recurring revenues. In the second quarter of 2013, its recurring revenues represented as much as 96% of the total revenue. Furthermore, like Iron Mountain Incorporated (NYSE:IRM) and Lamar Advertising Co (NASDAQ:LAMR), Equinix could deliver much more return to shareholders with its REIT conversion plan.
All three of these companies have large real estate assets and could benefit from tax savings on their rental income by converting themselves into REIT. Investors normally welcome this strategy, as REITrequires a distribution of at least 90% of their profits in dividends. The sluggish share price performance was due to the news that the U.S. Internal Revenue Service was looking into restricting the types of business operations that would qualify for REIT conversion. The IRS review might mean that it won’t be easy for those three businesses with nontraditional real estate operations to get approval for conversion.
Growing operating performance
For the full year, Equinix Inc (NASDAQ:EQIX) expects to generate around $2.13 billion to $2.14 billion in revenue, with the adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) staying in the range of $985 – $990 million. The adjusted discretionary free cash flow is also estimated to rise significantly, from $548 million in 2012 to $620-$640 million in 2013.
Ron Baron, in his second quarter comments to shareholders, mentioned that he liked Equinix Inc (NASDAQ:EQIX) due to its “tethering” of customers in a network neutral environment. He is still bullish about Equinix, regardless of whether it could converted into REIT.
Despite the year-to-date drop, neither Equinix Inc (NASDAQ:EQIX) or Iron Mountain Incorporated (NYSE:IRM) are cheaply valued. Equinix is trading at $177.20 per share, with a total market cap of $8.75 billion. The market values Equinix quite expensively, at 13.70 times its trailing EBITDA. Iron Mountain is trading at $28.30 per share, with the total market cap of $5.4 billion. The market values Iron Mountain at 10.70 times its trailing EBITDA.
While Equinix Inc (NASDAQ:EQIX) and Iron Mountain Incorporated (NYSE:IRM) are similar in their data center operations, Lamar Advertising Co (NASDAQ:LAMR) is a bit different with its outdoor advertising activities. Lamar is not cheaply valued either; it trades at $43.80 per share, with a total market cap of $4.13 billion. The market values Lamar at around 12 times its trailing EBITDA.
Income investors would like Iron Mountain Incorporated (NYSE:IRM) the most, because of its juicy dividend yield at 3.80%. Lamar Advertising Co (NASDAQ:LAMR) and Equinix Inc (NASDAQ:EQIX) have not paid any dividends yet.
If Iron Mountain Incorporated (NYSE:IRM) could convert itself to REIT, it expects to generate around $625 million in adjusted funds from operations, or $3.63 per share. It would pay shareholders $400 – $435 million in dividends, or $2.33 – $2.53 dividend per share.