Iron Mountain Valuation Steep
While we remain encouraged by strength in Iron Mountain Incorporated's (IRM) storage services business, much of the company's growth has been through acquisitions, which involves integration risk. This becomes more difficult with the company's growing revenue base as it will be required to make larger acquisitions.
IRM posted a strong Q1 and raised guidance. On May 1, 2008, Iron Mountain announced its financial results for the first quarter ended March 31, 2008. Revenue for the quarter exceeded management's guidance and our estimate of $733 million. Total consolidated revenues were $749.4 million, representing an increase of 18.5% from $632.5 million reported in the year-ago quarter.
However, the company's decreasing operating margin as a result of higher SG&A expenses could cut into earnings growth. Moreover, we are concerned about IRM's rising level of debt. Shares of Iron Mountain are currently trading at 39.6x our 2008 earnings estimate of $0.77, representing a large premium to the industry mean and the S&P. On a P/S ratio, the stock is trading at 2.0x our 2008 sales estimate of $15.26 per share, also representing a premium to its industry mean and median.
However, direct industry comparisons are difficult since most of IRM's most relevant competitors are privately held, such as SunGard Data Systems, Lason, Inc, and SOURCECORP Incorporated. As long as the company continues to perform at a high level, we believe the shares can maintain their current valuation, and perhaps increase slightly, but would not chase the stock at current levels. We, therefore, maintain a Hold rating on IRM shares, and set our six-month price target to $32, based on a P/S multiple of 2.1x our 2008 sales estimate, the high-end of its peer group range.
Shares of CLUB Undervalued
We consider the shares of Town Sports International Holdings, Inc. (CLUB) to be undervalued near current levels. The company reported solid Q1 results, reiterating an outlook for 2008 in-line with our expectation.
Along with its Q1 earnings announcement, management reiterated its previous 2008 financial guidance. Total revenue is expected to be in the range of $510 million to $520 million, representing 8% to 10% growth over 2007, primarily driven by club membership and ancillary revenue growth, the maturation of recently opened clubs, as well as new clubs expected to be opened during 2008. Net income is forecasted between $21.3 million and $22.3 million with earnings per diluted share between $0.80 and $0.84 for 2008.
The shares currently trade at approximately 8.8x our 2008 EPS estimate. In comparison, the company's only publicly-traded peer, Life Time Fitness (LTM), currently trades at a multiple of approximately 18.2x the consensus 2008 EPS estimate.
Shares of CLUB are trading at approximately 4.25x our 2008 EBITDA estimate a multiple which we consider to be excessively low.
