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Stock Strategist

Iron Mountain's King of the Hill

We believe that even as a REIT, the company's narrow economic moat remains in storage.

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Boxes have been the basis of  Iron Mountain's (IRM) cash flow annuity for the better part of six decades, allowing investors the chance to participate in the growth of a stable recurring revenue stream. However, the company's successful pursuit of real estate investment trust status sent a strong signal to the market that earnings reinvestment opportunities are limited and the time had come to milk the cash cow. In the context of a digital world, it is easy to conclude that Iron Mountain's paper-based empire reached its peak long ago. Nevertheless, we don't expect this mountain to erode overnight. Even as a REIT, Iron Mountain's ability to produce rental income is predicated on preserving a stable base of stored boxes as it repositions itself for the realities of a changing business model. Although we acknowledge the competitive difficulties of an industry in secular decline, we believe Iron Mountain's scale-driven cost advantage backs a narrow economic moat that protects long-term value generation for shareholders.

Scale Leads to Major Competitive Advantages
Even as a REIT, Iron Mountain's future rental profits depend on keeping its warehouses filled with boxes. With nearly 500 million cubic feet of records housed in more than 67 million square feet of worldwide warehouse space, Iron Mountain's industry-leading scale is the main competitive advantage that underpins our narrow Morningstar Economic Moat Rating. Iron Mountain built its storage business by capturing physical records from nearly 95% of the Fortune 500. These large, multinational companies in pursuit of global expansion left behind a fairly lengthy paper trail that Iron Mountain happily housed, typically for decades at a time. The company's unparalleled dominance in the sheer volume of stored records would be extremely difficult and costly to replicate, in our view.

Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.