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Jail House Stocks
On Jun 3, 2007, the world watched with fascination as a young woman checked into the Century Regional Detention Facility in Lynwood, California. Paris Hilton was beginning a 45 day jail sentence as a result of a probation violation stemming from a driving on a suspended license charge. That evening it was the lead story on every cable and network news channel. I wont even begin to comment on our, or for that matter, the worlds, fascination with the ubiquitous heiress. However, the story did draw attention to the United States penal system, the worlds largest.
Despite overall declines in violent crime, the total number of persons incarcerated by federal or state authorities as of Jun, 2006 was approximately 1.6 million, up 2.8% from the prior year. If you include local jails, that number jumps to over 2.2 million, according to the Justice Departments Bureau of Justice Statistics. The report marked the largest increase in prison and jail inmate populations since mid-year 2000. The rising numbers are not geographically isolated either, as 42 states reported increases in their prison populations. Also, in mid-2006, local jail facilities were operating at roughly 94% capacity, while state and federal prisons were operating at 1% below and 14% above capacity, and 34% above capacity, respectively.
Prison overcrowding is hardly a recent phenomenon. In fact, it is widely expected to worsen. According to a report by the Pew Charitable Trusts, a nonprofit research institution, inmate populations are expected to increase 13% by 2011, resulting in roughly $27.5 billion in additional funding over the next five years. This burden presents a unique opportunity for privately managed prisons. The following companies are leaders in this booming industry.
GEO Group Inc. (GEO)
The GEO Group provides government-outsourced services in the management of correctional, detention and mental health facilities in the U.S., Australia, South Africa, the UK, and Canada. It offers industry related services including: security, administrative, rehabilitation, education, and health and food services. The companys operations include 69 correctional and residential treatment facilities, with a design capacity of roughly 59,000 beds.
During the first quarter, new contracts fueled a 28% increase in revenues to $237 million. Earnings-per-share of 22 cents exceeded expectations by two cents and increased over 40% year-over-year. After the latest earnings surprise, analysts increased their full-year 2007 and 2008 estimates by one penny to $1.06 and $1.32, respectively, continuing a trend of upward revisions.
The companys stock has reflected the recent earnings momentum and higher estimates by returning over 41% year-to-date. GEO also sports an ROE of 15.5%, the highest of its immediate peers. Lastly, with a forward price-to-earnings ratio of 25.1, the company trades at a premium to the market, as represented by the S&P 500, but at a discount to Cornell Companies and Corrections Corp. GEO is currently a Zacks Rank 3 (Hold) stock.
Corrections Corp. of America (CXW)
Corrections Corp. of America is the countrys largest owner and operator of privatized correctional and detention facilities and one of the largest prison operators in the U.S., behind only the federal government and three states. CXW currently operates 63 facilities, including 38 company-owned facilities, with a total design capacity of approximately 67,000 beds in 19 states and the District of Columbia. The company also offers a variety of rehabilitation and educational programs.
For the first quarter, CXW reported its seventh consecutive positive earnings surprise, surpassing expectations by 13%. Earnings of 26 cents per share increased over 44% from year-ago levels. Strong demand for prison beds drove an 11.5% rise in revenues to $350.9 million. Full-year estimates have been revised upward by three cents to $1.05 over the last three months. Next years estimates have followed a similar trend, rising to $1.26 from $1.22 over the same period.
CXW has performed remarkably well, climbing over 31% for 2007 after returning 50.8% in 2006. Its ROE of 11.3% is above that of Cornell Companies, but below GEO Group. Lastly, with a forward price-to-earnings ratio of 28.4, the company trades at premium to its highlighted peers and the overall market. CXW is currently a Zacks Rank 3 (Hold) stock.
Cornell Companies Inc. (CRN)
Cornell Companies Inc. provides correction, detention, education, rehabilitation and treatment services to adults and juveniles in federal, state and government agencies in the U.S. The company has three main business lines: adult secure, community-based corrections, and youth and families (including alternative education). The Company has 77 facilities in 16 states and the District of Columbia with a total service capacity of 18,209.
The most recent first-quarter release was uninspiring, as the company reported earnings of five cents per share, matching expectations. Revenues rose 6.9% to $89.6 million due to new programs opened during 2006, but were offset by lower revenues from the Great Plains Correctional Facility, whose population fell in anticipation of its closure in April. In contrast to GEO and Corrections Corp., CRN has seen downward revisions to both full-year 2007 and 2008 estimates, which strongly contributed to its current Zacks Rank of 5 (Strong Sell). On a positive note, Standard & Poors Ratings Services placed the company on positive CreditWatch due to sustained improvement in operating performance and stronger financial risk profile. Upon further reviews, Cornell could see its highly speculative or B- credit rating improved.
Year-to-date CRN has returned a respectful 22.3%, but has underperformed its aforementioned peers. Furthermore, the companys ROE of 7.9% is well below the industry average. Also, with a forward price-to-earnings ratio of 26.8, CRN trades at a premium to both the market and the seemingly better positioned GEO Group.