RRD.WI Donnelley (R.R.) & Sons Co.

We reiterate our long-term Neutral recommendation on Iron Mountain Inc. (IRM). The company reported second quarter 2011 earnings that were in line with the Zacks Consensus Estimate.

Though revenues increased on a year-over-year basis, they missed the Zacks Consensus Estimate. Results were driven by continued strong performance in the storage segment, which benefited from strength in the International Physical segment and sustained growth in the North Americabusiness.

Positives were derived from higher new product sales and lower destruction rates in the Global records management services.

The company expects revenues to grow in the range of 7% to 12% from 2011 to 2014. Management expects organic growth rates to average 6% to 10% over the next five years, driven by core volume growth and an increasing contribution from pricing, as the company leverages its scale and global presence.

We believe the company can reach its goals and deliver strong revenue growth through its recurring revenue model that generates steady margins and earnings momentum. International expansion, particularly in low-cost areas such as India, China, Russia and Brazil, are also expected to help.

However, increased selling, general and administrative expense from the comparable previous year and the massive debt balance (over 46.0% of its total asset balance) in Iron Mountain’s balance sheet will affect its operating results. Additionally, Iron Mountain has issued debt worth $400 million through Senior Subordinated Notes due in 2019. The fresh debt will further leverage Iron Mountain’s balance sheet.

Although Iron Mountain offers compelling products and has a strong market position, the company faces stiff competition from Equifax Inc. (EFX), R.R. Donnelley & Sons Co. (RRD), Dun & Bradstreet Corp. (DNB) and Hewitt Associates Inc. In order to compete aggressively, IronMountainmay lower its price point leading to severe pricing pressure.

Currently, Iron Mountain has a Zacks #3 Rank, implying a short-term Hold rating.

 
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