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Fourth Quarter – GAAP and Underlying EPS $0.68; Underlying EPS Increases 38% and Underlying Operating Margin Expands 310 Basis Points to 14.0%

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Hewitt Associates is a recognized industry leader that will benefit as customers outsource human resources.

We are downgrading Iron Mountain Incorporated (IRM) to Neutral from Outperform with a lower six-month price target of $26.00, as we don’t see any near-term drivers of growth. Our price target represents a 2010 P/E multiple of 24.3x, a premium to the industry average. We currently do not see much upside to the shares from current [...]

(IRM) Iron Mountain Incorporated Downgraded

We are downgrading Iron Mountain Incorporated (IRM) to Neutral from Outperform with a lower six-month price target of $26.00, as we don’t see any near-term drivers of growth. Our price target represents a 2010 P/E multiple of 24.3x, a premium to the industry average.

We currently do not see much upside to the shares from current levels due to softness in Services revenue (approximately 46% of total revenue), driven by the weak economy. We believe the stock is over-priced and near-term momentum is not envisioned.

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 we would not chase the stock at these levels.

The company’s third quarter results were in line with Zacks Consensus Estimates. However, IRM narrowed the guidance range for 2009. It has also adopted an aggressive acquisition strategy to stimulate internal growth, especially in storage revenue. The company has also built a strong platform for future growth.

The continuing strength in the information protection and storage business has driven steady profits for IRM. With focused execution, substantial recurring revenue, steady margins, earnings momentum, cost savings, international expansion and proven value proposition, we remain optimistic on the company’s long-term prospects.

Despite these positives, we would like to caution investors about the high level of debt, the high valuation and dependence on large acquisitions for growth. Moreover, softness in the Services business, strong competition and foreign currency fluctuations are other negatives.

Although Iron Mountain has a strong product and market position, the company is still small relative to competitors such as Equifax (EFX), R.R. Donnelley & Sons (RRD), Dun & Bradstreet Corp. (DNB) and Hewitt Associates, Inc. (HEW).

Shares of Iron Mountain are currently trading at a P/E multiple of 22.9x our 2010 earnings estimate of $1.07, a premium to the industry average and the S&P 500. Over the last five years, Iron Mountain’s shares have traded in a range of 25.1X to 50.8X trailing 12-month earnings.
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Hewitt Associates Inc. (HEW) reported fourth quarter 2009 EPS of 68 cents per share, exceeding the Zacks Consensus Estimate of 63 cents per share. Revenue Revenue of $757.7 million was down 6.0% from $806.7 million reported in the year-ago quarter. This revenue decline may be attributed to lower revenue across all its segments, except the benefits outsourcing [...]

(HEW) Hewitt Associates Tops Expectations on Lower Revenue

Hewitt Associates Inc. (HEW) reported fourth quarter 2009 EPS of 68 cents per share, exceeding the Zacks Consensus Estimate of 63 cents per share. 

Revenue 
Revenue of $757.7 million was down 6.0% from $806.7 million reported in the year-ago quarter. This revenue decline may be attributed to lower revenue across all its segments, except the benefits outsourcing division. Excluding third party supplier revenue, $16.9 million of unfavorable foreign currency translation, $6.8 million contribution from an acquisition in the quarter and a $9.4 million contribution from the HR BPO business in the prior-year quarter, net revenue declined 4.0%. 

Revenue Segments 
The Benefits Outsourcing segment revenue for the quarter was $388.7 million, flat compared with $387.9 million in the prior-year quarter. Revenue was up 1% after adjusting for $2.3 million of unfavorable foreign currency translation. Revenue growth on an adjusted basis was principally driven by growth in large-market and mid-market clients, offset to a certain extent by lower project revenue. 

The Human Resource Business Process Outsourcing segment reported revenue of $113.9 million, down 16.0% compared to $135.1 million in the prior-year quarter. Revenue decreased 10% after excluding third-party supplier revenues in both periods and adjusting for $2.3 million of unfavorable foreign currency translation and $9.4 million comparable contribution from divested businesses. 

The Consulting segment revenue was $265.2 million, down 10% compared with $295.8 million in the prior-year quarter. Consulting revenues declined 9% after adjusting for $12.3 million of unfavorable foreign currency translation and a $6.8 million contribution from an acquisition, both in the current year. Revenue in this segment declined as a result of Talent and Organizational Consulting services across all regions and in Communication and Health Management services in North America. This was partially offset by growth in Retirement and Financial Management services in North America and Europe. 

Operating Results 
Operating income for the quarter was $105.8 million, up 95% compared to $54.3 million in the prior-year quarter. Reported operating margin was 14.0%, compared with 6.7% in the prior-year quarter. Operating margin improved as a result of lower performance-based compensation, staffing leverage, and lower selling, general and administrative expenses. 

Net income for the quarter was $64.4 million, or $0.68 per diluted share, up from $31.6 million or $0.32 per diluted share in the prior-year quarter. Underlying net income (after excluding unusual items) for the quarter was $64.4 million or $0.68 per share, compared to $48.3 million, or $0.49 per diluted share in the year-ago quarter. 

Balance Sheet & Share Repurchase 
The company exited the quarter with cash, cash equivalents and short term investments of $642.6 million. Debt and capital lease obligations (including current portion) for the quarter was $654.84 million. During the recently concluded quarter the company repurchased 1.0 million of its outstanding common shares at an average price of $30.19 per share, or a total cost of $30.1 million. 

Fiscal Year 2009 Result 
For the full year 2009, net revenue was $3.00 billion, down 5.0% compared with $3.15 billion in the prior year. Net revenues were flat after adjusting for foreign currency translation, acquisitions and divestitures, HR Business Process Outsourcing (HR BPO) contract restructurings in the prior year and third-party revenues. Reported operating income for the full year grew to $434.1 million, up 39% compared with $312.8 million in the prior year. The company reported net income of $265.1 million, or $2.78 per diluted share, up from $188.1 million, or $1.85 per diluted share in the prior year. 

For fiscal year 2009, the company generated operating cash flow of $433.0 million, compared with $327.9 million in the prior year. Free cash flow for the year on a non-GAAP basis calculated as cash flow from operations less capital expenditures and capitalized software costs, was $305.1 million, compared with $210.3 million in the prior year. The improvement in free cash flow can be attributed to improved receivables collections and stronger operating performance, partially offset by lower outsourcing net deferrals and higher performance-based compensation related to fiscal 2008 performance. 

Guidance 
For the fiscal year 2010, the company expects low to mid single-digit net revenue growth, with good growth in consulting, flattish outsourcing and a decline in HR BPO. Diluted earnings per share are expected to be in the range of $2.85 to $2.95.
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