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Corrections Corp of America (NYSE:CXW) has the prison on lock-down. The Nashville based company operates more than 60 correctional, detention, and juvenile facilities with a capacity of some 70,000 beds in 20 states. Corrections Corp. also provides a full complement of inmate services including foodservice, healthcare, education, vocational training, and substance abuse counseling and care. We're just getting to know the stock, but we think the overall story has legs.

We view CXW as a pure play on the detention of illegal immigrants. The Department of Homeland Security's secure border initiative, passed in 2005, calls for at least 1,000 new border patrol agents and approximately $4B in funding for US Immigration & Customs Enforcement, including $90M for detention beds alone. Clearly, this bodes well for prison operators like CXW.

The firm recently signed several new contracts in the 1H06 (which could add b/t $25-$50M to the top line) and improved its credit facilities (leading to better borrowing terms). Accelerated debt retirement could add to better EPS visibility, investor confidence, and a higher stock price. More importantly, we think a large inventory of available beds could hit full capacity by Q207 and would gladly invest if given a margin of safety. The stock currently trades at 27.5 x 2006 EPS estimates or 2 x expected earnings growth of 14%. With demand growth for prison beds outstripping supply growth, we think shares of CXW could crest to new altitudes over the next few months (stock currently near 52 wk high), assuming the Street wakes up and smells this secular growth story.

CXW 1-yr chart:

Source: Corrections Corp of America: Prison Play Could Lock in Some Mad Gains