Iron Mountain Incorporated (IRM): This Stock’s Dividend Could Double on Successful REIT Conversion

Cintas Corporation (NASDAQ:CTAS) is the largest uniform rental company in the U.S., with uniform and ancillary rentals, first-aid and safety products accounting for more than 90% of its revenue. Document-management services, mainly relating to shredding, are responsible for the remaining revenue contribution. With a significant amount of the revenue in document-management services derived from the sale of shredded paper to paper recyclers, Cintas is also far more dependent on paper prices than Iron Mountain.

Cintas Corporation (NASDAQ:CTAS) revised the upper end of its full-year fiscal 2013 EPS guidance from $2.54 to $2.58 on the back of record quarterly revenue in the third quarter, which was led by better-than-expected uniform rentals. I am not considering Cintas, given its cyclical exposure to U.S. job growth.

Sovran Self Storage Inc (NYSE:SSS) is a REIT focused on acquiring and managing self-storage facilitates. It has 471 self-storage facilities in 25 states across the country, of which 121 of them were acquired in the past two years. Despite being a REIT, Sovran is less cyclical since demand for storage is relatively inelastic and independent of economic cycles.

Sovran Self Storage Inc (NYSE:SSS) raised its full-year fiscal 2013 net operating income growth estimates guidance from a range of 5.0% to 5.5% to between 6.0% and 7.0% on higher rental rates and customer traffic in the first quarter of fiscal 2013. However, I am concerned about Sovran’s gearing, which has increased from 13% at the end of 2009 to 83% now. Moreover, it is expensive at 2.6 times P/B, close to the 10-year high P/B of 2.8.

Conclusion

Iron Mountain Incorporated (NYSE:IRM) boasts of high customer retention rates due to high customer switching costs and the element of stickiness associated with document-storage box rental. While revenue growth in recent years has been flat, I am optimistic on increased penetration of international emerging markets leading to a stronger growth outlook. It is reasonably valued at 10 times trailing-12 month EV/EBITDA and sports a 4.0% forward dividend yield. I will recommend buying Iron Mountain, with a successful REIT conversion as the catalyst for a re-rating of the stock.

The article This Stock’s Dividend Could Double on Successful REIT Conversion originally appeared on Fool.com and is written by Mark Lin.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Cintas. Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

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