Last week, the IRS gave Iron Mountain (IRM) what it wanted: REIT status. Since then, the storage company’s shares have jumped 18%–and JPMorgan thinks they could head higher.
AP JPMorgan’s Andrew Steinerman and Jeffrey Volshteyn explain why they now rate Iron Mountain Overweight:
Iron Mountain announced that it achieved IRS approval for REIT status retroactively as of January 1, 2014, completing a process that began in 2012. Iron Mountain stock leaped 20% on Thursday due to the large cash tax savings and the resulting increased dividend. We still see continued upside due to valuation as yield-oriented and REIT investors are attracted to Iron Mountain. While we recognize that Iron Mountain will not prospectively trade at a full real estate valuation (due to the services side of their business), the REIT structure should help highlight the sizable valuation gap that exists today and should narrow over time.
Iron Mountain is much cheaper than the industrial, self storage and data center REITs that carry dividend yields of 3.6%, 3.3% and 4.6% respectively. We believe the dividend yields of prison stocks (also non-traditional REITs), which have dividend yields of 6.3%, provide downside protection to Iron Mountain.
Prison REIT Corrections Corp of America (CXW) yields 6.2% and trades at 24.9 times earnings, while Geo Group (GEO) yields 6.4% on a P-E ratio of 20.8 times.
Shares of Iron Mountain have, while Correction Corp of America has and Geo Group has.
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