Bullish on Corrections Corp.

We highlight Corrections Corporation of America (CXW - Snapshot Report), Cornell Companies (CRN - Snapshot Report) and The Geo Group (GEO - Snapshot Report).

Strong Week for Corrections Corp.

Shares of Buy-rated Corrections Corporation of America (CXW - Snapshot Report) were up more than 25% last week.

Late last week, the company reported quarterly earnings that exceeded our expectation, and raised its full-year earnings guidance.

We continue to believe that the private-prison industry in the United States holds significant growth potential, and as the largest company in the industry, we consider CXW to be well-positioned to capitalize on growth going forward.

The detention and corrections industry in the United States comprises a $65 billion market. Presently, only 7.9% of detention and corrections facility beds in the country are outsourced to private companies. The trend in outsourcing has increased substantially in recent years, however. In 1990, privatized beds in the US system totaled fewer than 11,000. Today, privatized beds number more than 185,000, equating to a compound annual growth rate of approximately 17%.

CXW controls approximately 46% of the private prison and jail beds in the U.S., significantly more than competitors such as Cornell Companies (CRN - Snapshot Report) and The Geo Group (GEO - Snapshot Report). With this level of market share, we believe that the company is poised to win additional contracts as federal and state needs continue to increase.

Although state budgets are currently constrained -- with significant uncertainty regarding future funding -- the fact remains that prisons and detention centers are overcrowded, and the private prison industry offers states and federal agencies a viable solution.

CXW’s business model offers a relatively high level of visibility, with long-term contracts with its state and federal customers. In light of the large amount of uncertainty in the broad market presently, we view this level of visibility favorably.

Additionally, we note that the company generates significantly more free cash flow than GAAP net earnings, due in part to its high levels of property depreciation. For example, in fiscal 2008, net income was $1.21 per share, while adjusted free cash flow was $2.03 per share. Net income from continuing operations grew 14.4% year-over-year in fiscal 2008, while adjusted free cash flow grew by 24.2% during the same period.

Given our favorable outlook, we rate the shares a Buy with price target of $21.00 per share.