Private Prisons: A Reliable American Growth Industry

With the exception of the government's borrowing and spending activities, there are hardly any segments of the US economy that appear to have been inoculated against the recession which began in December 2007. There is one aspect of society however, that has continued to expand despite the difficult economic circumstances: the prison population. Additionally, and contrary to what many believe, the construction and management of jails and prisons are not functions exclusive to the government. In fact, the fourth largest correctional system in the nation is owned and operated by the Corrections Corporation of America (NYSE:CXW) - only the federal government and two states operate prison systems containing more bed space than CCA. As you can see from the chart below, the United States prison population has consistently risen since 1980 (earliest year I could find available data).

Furthermore, over the same 28 year period, the total US jail and prison population has represented an increasingly larger percentage of the total US civilian population.

Regardless of whether the US economy has technically bottomed or not, the reality is that cities and States across the country are dealing with substantial budget gaps that will require difficult decisions. (The same is obviously true at the federal level, with the exception of the difficult decisions part; Washington tends to avoid those). The situation is unlikely to improve in 2010, as continued property reassessments will diminish the property tax base even further. That being said, the decision to privatize prison construction and operation should appear ever more attractive to States looking to save money.

Let's assume for a moment though that, for whatever reason, the growth of private prisons does not deviate from its current trajectory, and CCA simply continues doing what it has over the past 5 years. Construction Corp. of America has clearly demonstrated solid revenue growth over the past half-decade. The Company's earnings have been growing at a more subdued pace since 2005, but capital expenditures have absolutely exploded; growing from $73.9M in 2005, to $516M in 2008. CCA isn't pouring nearly a third of its annual revenue into new property/plant investments without a reason. I'd expect that in the coming quarters, this amount of investment will begin to yield tangible returns for the Company.

Throughout the history of modern society, there has been a consistent need for the State to remove criminal offenders from the civilian population. In fact, this is considered the most basic responsibility of a government to its people. As the need for prison space continues its inevitable rise, the Corrections Corporation of America should be uniquely positioned to offer governments an efficient incarceration solution.

Disclosure: No position in CXW