CyrusOne Riding the Data Center Tsunami

Data-center services firm CyrusOne has been on the public markets as a standalone company since only Jan. 18, and the market has yet to take too much interest in it. While the stock is up a respectable 17% since its IPO, certain metrics point to much larger gains in the near future. On top of that, one top value investor has taken a double-digit stake in the company, giving cautious investors a big sign of confidence. With the company's first reported earnings fresh out of the box, let's see whether CyrusOne deserves your investment.

Earnings recap
For the first quarter, revenue climbed 15% based mainly on the overall growth of the sector. CyrusOne specializes in co-located, carrier-neutral data centers around the world. As of the most recent quarter, the company provides its services to 119 of the Fortune 1000. In this high-growth sector, projected to skyrocket in the coming years, the name of the game is land-grabbing. CyrusOne recently purchased an additional 33 acres in Houston, acquired two previously leased data centers, and signed new customer leases for an additional 31,000 square feet. In the year-ago quarter, the company had signed just 15,000 square feet.

At the end of the quarter, the company had 921,000 square feet available, up 14% from March of last year. Utilization is currently at 81%, down a bit from the 85% one year ago while slightly higher sequentially.


In terms of financials, investors want to look at some of the usual suspects, EBITDA, in addition to more industry-specific metrics, such as adjusted funds from operations (AFFO). When looking at REITs and lease-focused businesses, AFFO can be the strongest indicator of performance.

For the quarter, AFFO rose 45% to $17.5 million, while adjusted EBITDA boosted 11% over the year-ago quarter to $31.5 million. EBITDA margins came in at 52%, up from 48% in 2012.

The company's growth is masked by large upfront expenses because of its expansion and transition to public company status -- but investors should focus on the growing AFFO and likely increases as time goes on and more facilities are brought on line.

Important in such a competitive business, customer churn is incredibly low at just 0.4%.

Why it's a buy
According to management, 90% of enterprise firms are still managing their own data centers, creating an enormous growth runway for outsourced facilities and management.

Besides industry trends that are proving very favorable, CyrusOne is unique in that it's an underfollowed spinoff from Cincinnati Bell , which still owns more than 70% of the company. This results in limited liquidity for trade-focused Wall Street and, thus, a possible mispricing.

Furthermore, in terms of company-specific valuation, CyrusOne shines. One peer, Equinix , is not yet a REIT but plans to make the transition in 2015. Since AFFO figures are, thus, unavailable, we can look at normal earnings. Equinix trades at nearly 50 times expected one-year earnings. On a trailing EV/EBITDA basis, the company is priced at a 17.22 ratio. CyrusOne trades under 10 times trailing EV/EBITDA. Management has guided between $1.15 and $1.30 in funds from operations per share. On the high end of the guidance, which I believe is very possible given the industry trends and the company's customer acquisition metrics, this implies a forward P/E of just under 17.5.

CyrusOne will benefit from segment growth and multiple correction as the Street takes notice and the spinoff is fully realized. In addition, Mick McGuire of Marcato capital owns a nearly 12% stake in the company, much of which came from the firm's investment in Cincinnati Bell. As dictated in a presentation, much of McGuire's interest in Bell came from the pending spinoff.

Investors are wise to take a close look at this dividend-paying, fast-growing, and sharply undervalued company.

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The article CyrusOne Riding the Data Center Tsunami originally appeared on Fool.com.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Equinix and owns shares of Cincinnati Bell. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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