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August 31, 2014

Shareholders of private prison corporations already profiting from border problems

Images (1)As this CNN Money article highlights, because of the "crisis on the U.S.-Mexico border, ... Wall Street is betting that it will result in a boom for private prisons."  Here is more about who can profit from a need for prison beds:

Geo Group (GEO)and Corrections Corporation of America (CXW) are two of America's largest for-profit prison operators. They have thousands of open beds, and they have deep relationships with the federal agencies charged with doling out contracts to house undocumented immigrants, including children.

"It's highly likely that the federal government will have to turn to the private sector for help with this crisis. Both companies are extremely well positioned," said Brian Ruttenbur, an analyst at CRT Capital Group who covers the stocks of Geo Group and Corrections Corporation of America (CCA).

Investors are clearly seeing dollar signs. Shares of both CCA and Geo Group have spiked since the border crisis landed on front pages this summer. CCA has climbed 8.5% since July 30, and Geo Group is up over 7%. That's a lot better than the S&P 500's 1.5% advance over that time span.

The Obama administration has already shifted over $405 million in funds to address the crisis and is urging Congress to pass a $3.7 billion emergency supplemental bill. "Investors see this as an opportunity. This is a potentially untapped market that will have very strong demand," said Alex Friedmann, an activist investor who owns shares of both CCA and Geo Group....

Ruttenbur said CCA and Geo Group have both been talking to the federal government about how they can help. "We are always in conversations with our government partners including ICE, but we don't have anything new to report," a CCA spokesman told CNNMoney. Geo Group did not respond to a request for comment.

The best outcome for these companies would be landing a contract with the government to help house some of the undocumented immigrants at existing facilities that are currently idle. That's exactly what happened last month when the U.S. border control inked a contract with Geo Group to give its adult detention center in Karnes County, Texas a makeover. Now the facility is able to house hundreds of immigrant women and children....

Wall Street also applauded when CCA and Geo Group, which went public during the 1980s and 1990s, recently converted to real estate investment trusts, or REITs. That status, which is also used by hospitals and office building operators, gives them enormous tax advantages....

[I]nvestors are attracted to prison stocks because they give generate lots of cash flow, have strong dividend yields and high occupancy rates compared to other real estate options. "The long-term trends are very much in place right now because the federal, state and local governments aren't willing to put up the capital to build new facilities. The only group building new facilities is the private sector," said Ruttenbur.

August 31, 2014 at 06:46 PM | Permalink

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