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GEO Group: A Stock With An Options-Like Return Profile

Apr. 08, 2021 1:35 PM ETThe GEO Group, Inc. (GEO)154 Comments
Taron Kwak profile picture
Taron Kwak


  • My valuation indicates that GEO Group's fair value is about $15.61 per share, given the fact that it plays an important role in social safety.
  • Ongoing political and financial pressures have put it in a precarious position; I believe its price is now at an attractive level to buy and carries a huge upside potential.
  • I assume that GEO will transition to a combined real estate and IT technology business that will make it less controversial and involve less political risk.
  • GEO's current heavily indebted capital structure makes it options-like, and each successful debt payment it makes serves as a catalyst for investors to revalue its true value.

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The story of GEO Group

GEO Group (NYSE:GEO) is a specialty REIT that owns and manages secure facilities (put simply, prisons and jails) and runs community corrections (supervising people on parole and probation) in the United States, England, Australia, and the Republic of South Africa. Primarily serving federal government agencies and states, it has been one of two dominant players in the industry (along with its main competitor, CoreCivic (CXW)) since the 1980s.

In recent years, political and social issues, including mass incarceration and inhumane practices in prisons have caused a great deal of trouble in the prison industry. Moreover, many big financial institutions have announced that they will not provide financial services to private prison companies like GEO. As a result, GEO's stock price has trended downward over the past 5 years. To make matters worse, on Jan. 26, President Biden signed an executive order directing the attorney general not to renew federal contracts with private prison companies. As of April 7, 2021, GEO suspended its quarterly dividend payments, and its stock price collapsed heavily.

I think GEO's decision was reasonable, but reactions from the market were irrational because it did not affect GEO's fundamentals. Rather, the decision will help make more room to service its debt. Now, GEO's stock is trading at less than 4x of the P/FFO ratio, and I think this is deeply underpriced and it is high time to buy.

Data by YCharts

GEO's Correction & Detention business segment is definitely in decline due to decreasing prison populations, but that does not

This article was written by

Taron Kwak profile picture
Hello, I am from South Korea and a CFA charter holder since 2018. I like to invest in a company with attractive valuation and great qualities. Thank you.

Analyst’s Disclosure: I am/we are long GEO. 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.

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