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

Corrections Corp of America (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:

Comments

[NO DooDahs]

This is a good technical momentum play as well. Simply a stunning chart. Play the momentum with a trailing stop and give it some room!

[Ceviche Fund Partners LP/Dan Jacome]

Good call on our end, stock ripped estimates Q post Q - resuming coverage Monday 3/17/08 and will hopefully have it published it shortly thereafter here on SA.

thanks ~ dj

[Ceviche Fund Partners LP/Dan Jacome]

Just resumed coverage this evening with $37 PT off our $1.50 EPS 09 est. We would view pullbacks to the low 20s as the opportune pick up price - trader-driven investors can nibble here and flush out half at the 52 week high retest later this year; net, net, CXW remains our top "jail stock" given its EBIT expansion ops, best fit to meet capacity demand, and modest valuation (fetches 17x our 09 number, currently).

Thanks - DJ
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