We believe the REIT conversion of Correction Corporation of America (CXW) should increase shareholder value by increasing tax savings that drive increases in earnings and dividend payments.
On Feb. 14, 2013, the company announced that it will be added as a constituent of the MSCI U.S. REIT Index (RMZ) as of the market close Feb. 28, 2013. The MSCI U.S. REIT Index represents approximately 85% of the U.S. REIT universe. In addition, on Feb. 7, 2013, management highlighted the benefits of REIT conversion:
John Ferguson , Chairman of the Board, stated, "Based on a thorough analysis, our Board and management team believe that electing REIT status will maximize value for our shareholders through increases in free cash flow and dividends while continuing to provide significant earnings growth capacity.'
Damon Hininger , President and CEO, stated, 'The REIT structure will create additional opportunities for shareholder value creation. Additionally, our customers will experience no change in the people, procedures or high quality of service they have come to expect from CCA, nor will the conversion affect our employees.'
We are meaningfully increasing our FY 2013 estimate to reflect CXW's REIT status and guidance reflecting tax efficiencies. Our return expectations reflects what we believe will likely be the yield for the company over the longer term, based on the dividend guidance (4.8% expected yield on a midpoint dividend of $2.10).
For the fourth quarter, adjusted EPS of $0.44 was up 7.3% year over year, AFFO per share of $0.61 was up 13.0% year over year, and revenue of $436.9 million was essentially flat year over year and reflected mostly stable man days and a slight increase in revenue per man-day. We believe the stock will benefit in the coming months from incremental demand as new investors look at the name and better understand the earnings growth opportunity, stability of revenues, and attractive free cash flow growth dynamics.
Using forward 12-month consensus EPS data, the company's P/E ratio has historically traded in a range between 8 times and 24 times since January 2008. Currently, the stock trades at 17.9 times F12 P/E.
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