We would prefer not to have to change our fair value estimates, but such a thing is unavoidable with a material change of opinion regarding a firm’s prospects. This is the case with our valuation of the firm Iron Mountain (IRM).
This affects the Tear Sheet on Iron Mountain originally published on 14 June.
The IRM covered call investment has been decidedly mediocre in terms of performance, but as of the close yesterday, the recommended investment will still generate a small profit. There may be a way to generate a slightly larger profit by waiting until after the 25 September ex-dividend day to close the position, but the outcome of waiting is uncertain. Please see the Change of Opinion note linked above for more details regarding the tactic to capture IRM’s next dividend.
As to the reasoning for this change, reviewing the quarterly earnings statements the firm released on August 1, I simply got stuck on the fact that my worst-case profitability over the five-year explicit period was roughly twice that of what the firm has reported for the last few quarters. A few quarters does not a valuation make, but thinking about the report made me realize several things:
- Volume in the N. American business is not growing, despite record profits for U.S. firms (i.e., IRM’s domestic clients)
- IRM’s Overseas volume is growing, but these revenues generate substantially lower profitability than N. American ones.
- There is reason to believe that, at least in Europe, the lower profitability is a structural feature of the business.
In looking again at the company, I decided that the valuation scenarios were right, but that I had put too much weight on the best-case revenue + best-case profitability scenario and inappropriately dismissed the best-case revenue + worst-case profitability one. This best-case revenue + worst-case profitability equates to an economic scenario in which the U.S. generated flat or shrinking revenues while the less profitable overseas business generated positive ones.
Reassessing the likelihood of the valuation scenarios shifted the most likely valuation from a point in the mid-$30 range to a point in the mid- to high-$20 range.
While not pleased about the need to publish a change of opinion, we were less pleased with our characterization of this investment as Medium to High conviction. Considering the very wide range of possible valuation scenarios, I believe simply a “Medium” conviction level would have been more appropriate.