Avalon Correctional Services: Comparative Discount Per Prison Bed

In honor of the new season of one of the best shows on TV, Prison Break, I will profile a prison-related company that is trading below its intrinsic value.

Avalon Correctional Services (CITY.PK) engages in the ownership and operation of community correctional facilities. The company owns 3 facilities in Texas, 3 in Oklahoma, and 2 in Colorado. It also leases 2 facilities from the state of Colorado and one from Oklahoma. In total, the company oversees over 2400 beds in three states.

In February 2005, Avalon Correctional Services filed a Form 15, terminating their registration under the Securities and Exchange Act of 1934. The company claimed their reasoning behind the de-registration was “not only in the overall best interest of the Company’s shareholders, but it was crucial for the continuation of the Company as a going concern.”

Valuation:

Avalon Correctional Services has an enterprise value as of September 2006 of 28 million dollars (All liabilities beyond cash and cash equivalents on the balance sheet plus the current market capitalization of the company). Earnings before interest and taxes [EBIT] will be in approximately 4.5 million dollars at the end of 2006. This is a high single digit increase from the full year 2005 [EBIT].

Therefore the company is trading at slightly over 6 times EBIT, which is a relatively conservative valuation.

Three major competitors to Avalon Correctional Services in the prison outsourcing space are the following companies:

Geo Group (GEO)

Cornell Companies (CRN)

Corrections Corp. of America (CXW)

The following chart breaks down the price per bed that each current company’s enterprise value is reflecting.

Source: finance.yahoo.com, www.sec.gov, www.pinksheets.com

Avalon Correctional Services is trading at a significant discount per bed to all of their publicly traded competitors. Though there is a more significant growth component to both Corrections Corporation of America and the Cornell Companies, the discrepancy in the price per bed between the companies is still quite large.

On April 20, 2006 the Company sold their Union City facility to the State of Oklahoma for $4,400,000. This facility consisted of 160 beds, for a price per bed of $27,500.

Status as a Publicly Traded Company:

Though the company no longer files with the SEC, it does provide detailed financial statements through the Pinksheets .com website.

In December 2005, the MIDSOUTH INVESTOR FUND, a hedge fund with a reputation of investing in smaller companies, declared a 5.25 stake in the company, which presumably was acquired after the company filed its Form 15.

Conclusion:

Avalon Correctional Services is a statistically undervalued company with assets that are in high demand within the states that they operate. Even if the company lost their contracts with Colorado, Texas, and Oklahoma, these states could not afford the loss in prison capacity, and would most likely purchased by the states for a value higher than the company is currently trading.