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Bear of the Day: Corrections Corp of America (CXW)

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Corrections Corporation of America (CXW - Free Report) is a real estate investment trust that owns, operates and manages correctional, detention facilities and prisons primarily in the United States.

And its fortunes have fallen on hard times recently since mid-August when the US Department of Justice made a big decision.

The DoJ announced plans to phase out the use of private prisons, effectively killing the federally-funded wing of the private correctional services industry after concluding that the facilities are both less safe and less effective than their government-run counterparts.

In a memo released Thursday, Deputy Attorney General Sally Yates instructed officials to either decline to renew their contracts with private prisons, or “substantially reduce” the contracts’ scope.

“They simply do not provide the same level of correctional services, programs, and resources; they do not save substantially on costs; and as noted in a recent report by the Department’s Office of Inspector General, they do not maintain the same level of safety and security,” Yates wrote.

Analyst Reaction

In the past 90 days, Wall Street EPS estimates for CXW's 2017 calendar year have been slashed 22% from $2.68 to $2.60. And the stock was nearly cut in half from $27 to $14.

Revenue projections display a drop of over 13% so far as analysts try to figure out what business CXW may be able to hang on to.

According to a Dow Jones story on October 12 the situation is not as dire as you might think. They quote analysts from SunTrust who say "sentiment is overly negative" on Corrections Corp.

Citing its dividend and management's "consistent track record," the investment bank raised its rating on CXW to buy. According to reporter Patrick Sheridan "SunTrust says 'the firm is well positioned to improve margins as state budget conditions improve.' It also thinks the feds could lease or acquire CXW facilities in an effort to end for-profit relationships."

In addition to providing the fundamental residential services relating to inmates, the company also offers rehabilitation and educational programs, including basic education, religious services, life skills and employment training and substance abuse treatment. Corrections Corporation of America is based in Nashville, Tennessee.

The CXW story has a lot of moving parts right now. But until the business outlook is clearer and turns around, the earnings story is one to stay on the sidelines from. The Zacks Rank will let you know.

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