This article deals with a powder keg subject - prisons, more precisely, US prisons. Regardless of which side of the argument one takes, sadly, society still needs prisons, and probably always will. If you're OK with the idea of investing in them, please read on.
The two biggest publicly-traded US prison operators are CoreCivic, (CXW) and The GEO Group (GEO), which are both REITs. CXW focuses on US properties only, while GEO also has a bit of overseas exposure.
CXW operates with three segments - its traditional Safety segment, which holds the lion's share of its properties; its Properties segment, which develops properties, such as a 400,00 square foot correctional facility under construction leased to the Kansas Department of Corrections, and its Community segment, which has grown to become the second-largest community corrections provider in the US. It's the nation's largest owner of partnership correctional, detention and residential reentry facilities.
The company also offers various rehabilitation and educational programs, including basic education, religious services, life skills and employment training, and substance abuse treatment, as well as food services, work and recreational programs, and healthcare services, such as medical, dental, and mental health services. In addition, it leases its facilities to third-party operators.
In addition to its US operations, GEO has four facilities in Australia, one in the UK, and one in South Africa. Immigration and Customs Enforcement (ICE), the Bureau of Prisons (BOP), and the US Marshals Service are its top three customers, with ~42% of total revenue:
CXW has outperformed GEO and the market in 2019, over the past month, quarter, and year to date. It does trail the S&P a bit over the past year, but, throw in its dividends, and it would have a better total return.
CXW looks cheaper than GEO across the board on these valuations, including its price to trailing funds from operations - P/FFO, of 9.31X, vs. GEO's P/FFO of 10.82.
CXW just raised its 2019 guidance when it reported its Q1 '19 earnings this week. FFO/share guidance rose by 4.3%, to a $2.44 - $2.50 range, while diluted EPS guidance rose 7%.
GEO's management also raised its 2019 guidance, and management now expects full-year 2019 AFFO to be in a range of $2.64-$2.70 per diluted share, vs. their previous $2.50 - $2.60 range.
The problem with comparing the guidance is that CXW issued FFO guidance, but not AFFO guidance, while GEO issued AFFO guidance, but not FFO guidance.
However, here's how the updated 2019 low end of guidance compares to both firms' 2018 actuals: CXW earned $2.32 in FFO in 2018, so its $2.44 2019 guidance represents ~5.2% growth.
GEO earned $2.47 in AFFO/share in 2018, so its $2.64 AFFO guidance is ~6.9% growth.
This valuations table uses data from the four quarters ending 3/31/19:
Due to their prior problems in 2015 - 2016, (see Risks section), both companies have lousy dividend growth figures. CXW's management dropped the quarterly payout from $.54 to $.42 in Q4 '16, while GEO dropped its payout from $.70 to $.47 in Q1 '17.
GEO's management did raise it by a penny, to $.48 in Q1 '19, while CXW raised its dividend by a penny in Q1 '18, to $.43, and again in Q1 '19, to $.44.
CXW has the more conservative FFO payout ratio, at 74.57%, vs. 83.91% for GEO.
CXW had a minor amount of return of capital in its 2018 distributions - 7.75%.
GEO had 45.71% of its 2018 distributions classified as non-dividend, return of capital distributions:
Analysts Price Targets:
CXW is currently ~11% below analysts' lowest price target of $24.00 , and 13.4% below the consensus $24.50 price target.
We feature option trades for CXW in our DoubleDividendStocks.com service, which we won't divulge here, but we've worked up two trades for GEO.
GEO's December $22.50 call strike (which is just above the lowest price target for GEO) pays $.95 ~the same as its next two quarterly payouts, effectively allowing you to double your dividend.
Our Covered Calls Table has more details for this and over 35 other covered call trades, which are updated throughout each trading day.
For example, this December $17.50 put pays $1.10, a bit higher than GEO's next two dividends, and it gives you a breakeven of $16.40, which is ~9.7% below GEO's 52-week low, and ~17% below the $22.00 lowest price target.
To say that these firms have headline and political risk might be an understatement.
For example, JPMorgan Chase announced in March that it was withdrawing from doing any financing deals in the future with prisons as a result of its ongoing evaluations of the costs and benefits of serving different industries. Wells Fargo also announced in January that it was reducing its relationship with the prison industry as part of its "environmental and social risk management" process. (source)
CXW shed 7.5% and GEO lost 8.6% over the next few days following the JPMorgan announcement. CXW has recovered in price since then, but GEO is still at a lower price level.
CXW's shares came under a lot of pressure in 2015-2016 as the Department of Justice issued a memo directing the Federal Bureau of Prisons - the BOP, to decrease facility renewals of private prison operators. CXW fell all the way from ~$40.00 to under $15.00, while GEO fell from the high $20's to the low teens.
CXW has eight facilities which are sitting idle, which are a drag on earnings, that management is marketing for redeployment to its customer base. It remains to be seen if they'll end up writing down any of these facilities. Management does point out though that since these existing facilities are user/ready, they have an advantage in capex and quick deployment. GEO has 12 idle facilities.
Class-action suit - There's also a class-action suit vs. CXW, which claims that company execs misled the public about the quality of CXW's facilities. The class-action suit is led by Amalgamated Bank, which says it lost $1.2M when stocks fell after a 2016 U.S. Department of Justice memorandum directed the Bureau of Prisons to phase out contracts with private operators.
CXW's management counters that the DOJ directive was later rescinded, and the stock fully recovered in price. They also said a similar shareholder lawsuit against private prison operator GEO Group was dismissed by a federal judge in Florida. (source)
CXW's management responded to the 2015-16 DOJ pressures by diversifying the company's customer base - they've decreased exposure to both the BOP and California by 9%, and also have shed 11% of low-margin, managed-only operations. They've picked up the slack via new business with USMS and ICE, state and local governments, and their more diversified community and properties segments.
After struggling with negative growth in Q2 '18 and turning in better reports in Q3 and Q4 '18, CXW exceeded analysts' earnings estimates for Q1 '19, and had much stronger growth figures. This growth gave management the confidence to raise 2019 guidance, as mentioned earlier.
GEO's much stronger Q1 '19 has lifted up its trailing growth figures, which are now positive for FFO and FFO/share. There was a small ~3% growth in payouts, and, with the share count roughly flat, the better FFO/AFFO growth led to modest improvements in CXW's payout ratios:
The two companies' ROA and ROE ratios are roughly similar, but CXW has a much better Operating Margin. It also has much lower leverage than GEO, on a debt/equity, net debt/EBITDA, and net debt/FFO basis, in addition to having better EBITDA/Interest coverage.
CXW's next large debt maturity, $344M, comes in 2020, while GEO has $333M maturing in 2019. Its weighted cost of capital is 4.87%, and its debt is rated one notch below investment grade, BB, by Standard & Poor's.
53% of GEO's debt is at a fixed rate and its weighted cost of capital is 5.12%:
Although both companies earnings have started to turn around, these are probably best considered as contrarian trades due to the political risks involved.
All tables by www.DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
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Disclosure: I am/we are long CXW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.