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Highfields Capital Climbs Above 5% of Iron Mountain (NYSE:IRM)

Highfields Capital Management, a hedge fund which was seeded heavily by Harvard Management when it was launched by the endowment’s employee Jonathon Jacobson, filed with the SEC on August 2nd to report that it had purchased 9.2 million shares of Iron Mountain Incorporated (NYSE:IRM). Iron Mountain Incorporated provides records management and data protection services among other product offerings. Highfields’ ownership gives it 5.4% of the shares outstanding of the company, triggering the filing. The fund had owned 3 million shares of stock at the end of March, nearly double what it had owned at the beginning of 2012 (find more stock picks from Highfields Capital Management).

Jonathon Jacobson

Highfields isn’t the only hedge fund which had a significant position in the stock at the end of the first quarter. In fact, at that time according to 13F filings it owned fewer shares than Paul Singer’s Elliott Management; Elliott reported owning 8.5 million shares of the company after having initiated its position in the last three months of 2011 (see more of Paul Singer’s favorite stocks). Renaissance Technologies, managed by billionaire Jim Simons, nearly tripled its holdings of Iron Mountain Incorporated in the first quarter of this year.

Iron Mountain Incorporated (NYSE:IRM) has risen 6% this year, slightly underperforming the market, though it does pay a 3.3% dividend yield due to its stable business conditions. Its second quarter report showed flat revenue compared to the same period in 2011. Net income fell dramatically; this was primarily due to a loss on the sale of the company’s Italian operations as that country struggles economically, but even controlling for that earnings per share still decreased to 24 cents from 33 cents. A similar story holds for the first half of 2012: flat revenue, moderate decreases in earnings from continuing operations, and a large loss on sale driving down overall earnings.

These results are not great news for a company which is priced for growth at a trailing price-to-earnings ratio of 37. At a $5.6 billion market capitalization, even assuming the growth expectations predicted by sell-side analysts yields a forward P/E of 22. Cautious investors who worry about macroeconomic conditions in the U.S. and worldwide should also note Iron Mountain’s beta of 0.6, but there are likely better opportunities to find low-beta, dividend-paying stocks at lower valuations in other industries or sectors of the economy. In particular we think that investors should be skeptical that the company can deliver on its expected earnings growth if its earnings are down compared to the previous year and its revenues are more or less unchanged.

Iron Mountain Incorporated (NYSE:IRM) can be compared to business services company Cintas Corporation (NASDAQ:CTAS), which has a document management services division among its other operations. Cintas Corporation (NASDAQ:CTAS) grew its earnings in its most recent quarter compared to the same period in the previous year and trades at 18 times trailing earnings. While much of its business is in the less exciting field of providing company-branded attire for employees, it may be a better value. We would also consider Automatic Data Processing (NASDAQ:ADP) and Amdocs Limited (NYSE:DOX) to be peers on the grounds that these companies also deal in information and data management, though with a focus on payroll and revenue functions. Both companies saw mid-single digit increases in earnings in their most recent quarter compared to the same quarter in 2011, providing some confidence that their growth will continue. Automatic Data Processing (NASDAQ:ADP), which at a $28 billion cap is a much larger company than Iron Mountain, trades at 20 times trailing earnings while Amdocs Limited (NYSE:DOX) trades at a trailing P/E of 14. As with Cintas, we would at least at a high level consider these stocks to be better buys. Unless an investor is confident that Iron Mountain’s revenue or margins are about to turn around, or they trust that Highfields knows what it is doing, we would recommend against investing in the stock.

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