Company Spotlight - Corrections Corp. Of America (NYSE:CXW)

  Bad Boys, Good Profits

January 4, 2008 - Corrections Corp. Of America (CXW-NYSE) has locked up a big share of the private prison market. The company operates more than 60 correctional, detention, and juvenile facilities with a capacity of some 72,000 beds in 19 states and Washington, DC. CCA contracts with federal, state, and local authorities to manage the facilities, about 40 of which are company-owned. CCA also owns three facilities that are managed by other companies. Federal correctional and detention authorities account for 40% of CCA's sales. The company provides rehabilitation programs for inmates of its facilities.

CCA started with a bang.  The stock traded as high as $148.80 in 1997, 2 years after it went public.  Within 3 years, it was down to 60 cents a share, hitting bottom in late 2000. (All prices adjusted for reverse splits and splits.)  Then earnings jumped in 2002 to $1.03 share, up from a deficit of 5 cents a share in 2001.  The stock improved and kept going.

The company has contracts with the Federal Bureau of Prisons, U.S. Marshals Service Bureau of Immigration & Customs Enforcements, as well as various local agencies.  A majority of their biggest customers are managing prisons that are at capacity and beyond.  Most noteworthy is the Federal Bureau of Prisons with prisons overflowing by 1/3 more inmates than the buildings were meant to hold.  California and Arizona have the same overcrowding problem and are seeking help from CCA.  Part of the "growth" in the market comes from vigorous enforcement of immigration laws, a political favorite during election times.  

The company is developing more than 10,000 new beds to keep up with demand.  At the end of the third quarter, CCA had 75,330 beds.  Completion of new facilities with the added beds will most likely be completed in 2009.  The company has financial capacity to add another 7000 beds on top of the 10,000.  Since new facilities are costly to build and staff, they don't contribute fully to the bottom line until the last bed is filled.  Look for operating margins to widen as these prisons begin to populate and eventually reach capacity.

Other numbers: Net profit margin was 8% in 2006, with analysts predicting 8.8% and 9.8% in the next 2 years.  Return on equity was 10% last year.  Look for 11% and 12% this year and next.  There's $165 million in cash in current assets which outnumber current liabilities by almost 2 to 1.  There is no dividend.  The market cap is $3.7 billion with 124.149 million shares outstanding.  

This is a unique investment, one that has risen phoenix-like over the last 7 years.  Earnings appear to be solid and dependable for at least the next 2 or 3 years as new prisons are built and filled.  While the P/E is relatively high at 26, investors have always paid extra for certainty.  Of course, nothing is absolutely certain, but with this being a political year,  immigration laws will be vigorously enforced.  That means more business for CCA for some time to come.

- Company Web site: www.correctionscorp.com

- Ted Allrich