Tuesday, December 30, 2008

ADD of Corrections Corp of America (CXW) with cash flow

Corrections Corporation of America (CXW)  has a business that is not dependent on the health of the U.S. economy.  In fact, a good argument could be made that a worsening in employment will result in more crime and hence more business for CXW.  I bought just 50 with a market order which was filled at 15.60.  Corrections is based in Nashville and it is the largest private operator of prisons in the U.S.  While I can not be positive, I do not believe that I have ever owned it or one of its predecessor companies.  I barely can keep track of what I now own, let alone remembering what I may have owned many years ago when the decades are starting to just blend into one another.  I do remember being very negative about this company at one point, probably back around 1999 to 2000, or thereabouts, because of its structure as a REIT called Prison Realty with a separate management entity that created a host of problems.  I do not remember the details but the company did suffer a near death experience around 2000.  It had a reverse 1 for 10 stock split which is never a good thing, but it recovered thereafter after being reorganized in its current form as a regular C corporation. I rose from around 1 to over 33 last year, adjusted for some splits, and entered a bear market phase falling more than 50% to its current price today.  

I have been reviewing a number of reports on the company for the past two days and a couple of its 10-Qs.   The company is either a large small cap or a small mid-cap with a market capitalization of around 2 billion.  It has about 1.115 billion in debt with all of it maturing between 2011 to 2014 as shown on p. 10 of its recent 10-Q filing.    Form 10-Q

I thought the best analysts' reports were the ones from Barclays and Zachs. The Barclays report is one of the best that I have read this year. I also reviewed reports from Value Line which was positive over the long term, Ned Davis which has a buy and Market Edge which has a sell rating.  The current earnings estimates for all the analysts is $1.18 in 2008 and  $1.34 in 2009.  If the 2009 estimate holds, then the forward P/E is around 11, with a P.E.G. of less than 1.  Price to sales is a little over 1. CXW: Key Statistics for CORR CP OF AM (NEW) - Yahoo! Finance

Part of the recent downdraft was a downward revision in management's estimate for the 4th quarter earnings by about 3 cents due in part to a delay in a ramp up at a California facility.  This was apparently cured in early November.  This seemed to be some kind of bureaucratic hang-up which required compliance with certain medical requirements established by a federal medical receiver that had jurisdiction to oversee healthcare delivery in the state prison system in California. 

I read in one of the reports that the prison population has just recently expanded to more than 1 in 100 American adults for the first time.   While prisons operated by private companies only account for less than 8% of the prison population, it appears to be a growth industry now.   One of the negatives pointed out is the pricing pressure from the local and state governments who are under strain due to the credit crisis.  I suspect that this would be true.  Conversely, the credit crisis would also make it more likely that state and local governments will turn to private operators to build and manage their prisons.  CXW plans to increase its capacity by about 10,000 beds over the next year or so.  About 23 states are operating at above their capacity with the Federal system operating substantially in excess of its capacity.  Over 40% of CXW's 2007 revenue came from the federal government.  This is pointed out on page 6 of the Barclay's report from 11/7/2008 which contains a discussion of CXW's business with the Federal Bureau of Prisons, Immigrations and Customs, and the U.S. Marshalls.  

Since I am only investing cash flow, I only bought 50 shares today.  I will be in a position to add another 50 shortly if I can average down.  Barclays has a 26 target on the stock.  I would be most satisfied with a 25 price within 3 years.  

As I finished this post, I checked the price again and it has fallen over a dime from my purchase price. 


  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

No comments:

Post a Comment