Corrections Corp Of America (CXW) / The GEO Group Inc (GEO): Here’s Why Stock Reaction Seems Like Over Kill

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Shares of both the companies collapsed in wake of reports stating the DoJ’s plans to end use of BoP contract private prisons

Yesterday, State Justice Department revealed plans to end the use of contract prisons. In the wake of this news, Corrections Corp Of America (NYSE:CXW) and The GEO Group Inc (NYSE:GEO) stock collapsed heavily. Corrections Corp stock was down 35.45% to close at $17.57, while GEO stock closed down 39.58% at $19.51. Cannacord Genuity analyst weighed in on both the companies and said that the stock reaction was overdone, even though the news is clearly negative.

“For GEO, at around the current price, the stock is trading at close to a 20% free cash flow yield and CXW is close to 15%. Additionally, with only ~11% BoP risk to GEO and 9% to CXW, the massive falloffs in the stocks imply that the risk will spread to other federal, state and local jurisdictions,” said Cannacord analyst, Ryan Meliker. According to him, the stock reaction is based more on fear related to cash flow risks.

Mr. Meliker highlights that the plan unveiled by Department of Justice has 13 private prisons under the authority of CXW and GEO. In his view, they do not impact ICE contracts, state contracts or US Marshall contracts. He added that Corrections Corp has 9% revenue exposure to Bureau of Prisons, while the GEO Group has 11% revenue exposure to BOP, excluding its entirely private halfway house business. Including halfway houses, GEO has 15% revenue exposure to BOP.   

The plan indicates that the contracts would not be renewed by BoP as they mature. Cannacord analyst believes that the enactment over the plan would not be overnight. Sally Q. Yates, Deputy Attorney General stated that DoJ would not end existing contracts, however, it would review the ones needing renewal over a period of next 5 years.

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