Health care is a salient issue today, but services in correctional settings are rarely discussed by politicians. Nonetheless, the health and well being of detainees and inmates are high on the priority list of law enforcement and corrections officials, who are mandated by the Constitution to ensure the physical and mental health of men and women behind bars. The burden is awkward for agencies that are better trained for safety and security tasks than to diagnose, prescribe and nurse. More importantly it is costly to maintain in-house health care programs. Consequently, in recent years there has been a shift to outsourcing health care functions in jails and prisons. The trend has fostered a crop of private correctional operations offering medical and behavioral health care services.
There is a handful of significant corrections health care providers. Prison Health Services, a division of America Service Group (ASGR) based in Tennessee, serves state prisons as well as county detention facilities. ASG claims approximately 6% of the total market, including both privatized and non-privatized correctional health care services. ASGR shares are trading at 13.9 times trailing earnings as investors have shrugged off earnings misses in the last three quarters.
Four other private companies also hold significant market share. Like ASG, Correctional Medical Services, Inc. (CMS) in Missouri provides care to inmates in both state prisons and county detention facilities. CMS claims to operate 300 sites in 24 states, serving over 250,000 inmates. Wexford Health Sources, Inc. is self-described as a physician-driven institutional health care program, serving state and county agencies in thirteen states and treating as many as 90,000 patients in 100 facilities. A third private provider is NaphCare based in Alabama. NaphCare claims to serve over 67,000 inmates at 41 sites in nineteen states, including federal prisons, state prisons and county jails. PrimeCare Medical, Inc. of Harrisburg, PA has contracts covering 52 local and state facilities in four states, but does not disclose inmate populations. PrimeCare operates in Maryland, New Hampshire and Pennsylvania.
Conmed Healthcare Management (CNMD) is a significant “up and comer” in the local detention center market. Two recent contract awards bring to six the number of new relationships Conmed has established in the last twelve months, including the company’s largest contract in its history in Pima County, Arizona. Conmed now serves over 17,000 detainees in fifty-one county sites over seven states. The company’s revenue run rate has expanded at an impressive rate from $26.0 million in March 2007, $34 million in March 2008 and $51.0 million in March 2009, representing 31% and 50% annual growth in the revenue run rate in the last two years, respectively. We estimate that the revenue run rate is now $52.5 million.
Shares of Conmed established a triple top breakout on early May 2009, suggesting a bullish price objective of $6.50 per share. This is well above our current price target for CMHM shares of $5.50 per share. Above average trading volume propelled the stock to a new 52-week high in trading in recent weeks and establishing what we believe may be a new line of price support at the $2.90 to $3.00 price level. Fundamentals remain strong for Conmed as the company continues to execute smartly on all detention center contracts.
There are also a couple of providers that focus on the riskier prison system health care services - riskier because health issues for inmates held for longer periods can involve more intensive treatments and hospitalization. Geo Group, Inc. (GEO) operates in the U.S., Canada, Australia, South Africa and the U.K., providing both medical and behavioral health care. Revenue topped $1.0 billion in the twelve months ending March 2009, on which GEO reported a 5.8% net profit margin.
Another significant player in the state and federal prison market is Corrections Corporation of America (CXW), which provides prison management as well as health care services. The company reported $1.6 billion in revenue in the twelve months ending March 2009, from a network of 65 correctional and detention facilities spread out over 19 states. Corrections Corp. owns 44 of those facilities, which we believe helps contribute to the company’s 9.4% profit margin.
GEO and CXW are trading at 11.9 times and 12.2 times forward earnings. Earnings multiples are off historic levels but are still higher than projected growth rates, implying PEG ratios over 1.0. Both stocks have partially recovered from 52-week lows set in early 2009.
Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Speculative Buy recommendation on CMHM shares.
