Thursday, September 27, 2012

Why Is Buffett Buying Shares of Iron Mountain, Fiserv?

Warren Buffett used to say that he never invested in technology companies because he doesn’t understand them. That doesn’t mean that his holding company, Berskhire Hathaway (BRK.A), doesn’t invest in information technology companies. Recently, Buffett’s company has had an appetite for information services companies. These investments were probably made by Charlie Munger or Lou Simpson.

He now owns 8 million shares of Iron Mountain Inc. (IRM) which provides information management services to IT companies. The company offers document management, data protection, destruction services, and records management services. Iron Mountain is one of the companies on the cutting edge of cloud computing. Buffett also owns 4.4 million shares of Fiserv (FISV). Fiserv offers information management services and electronic payment processing solutions to its clients.

So, why is Buffett buying shares of both of these companies?

It’s simple really. Both companies are classic Buffett investments. Fiserv and Iron Mountain both generate large amounts of free cash flow. Fiserv generates $970 million dollars in free cash flow and Iron Mountain has $630 million dollars in free cash. Both companies have similar balance sheets with $300 million in cash and $3 billion dollars in long term debt.

Both companies had straight years of sequential revenue growth until last year. The economic crash of 2009 hit the service revenues for both companies as clients ratcheted down capital spending. Iron Mountain had nine straight years of revenue growth before last year. Fiserv had a streak of consecutive earnings growth until the company had its first revenue drop in 2009.

Fiserv trades at 12.5 times earnings which is right in line with the historical growth rate. Iron Mountain trades at 17.5 times earnings which is slightly higher than the 13.6% historical growth rate. Neither company could be classified as a steal or as expensive. Both companies appear reasonably valued. They trade at PEG ratios close to 1.

E-commerce is the present and future of business. The market is still in its infancy and has great growth potential. E-commerce sales are currently 7% of all United States retail sales and are expected to hit $170 billion dollars this year. Berkshire Hathaway’s investments in both firms are clearly designed to benefit from this emerging trend.

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