Analyst Jim McDonald of First Analysis Securities in Chicago sees the big three private-prison companies - Wackenhut Corrections, Corrections Corp. of America and Cornell Cos. - shifting their emphasis from the states to the federal prison management for at least the next two years.
"The companies are just following the opportunity," McDonald said.
Wackenhut Corrections (NYSE: WHC, $15.50) is holding its own at the bottom line. In the third quarter, it reported profit of $5.8 million, or 27 cents a share, compared with $2.4 million, or 11 cents a share, in the same period a year ago, the company said Thursday. Third-quarter 2001 revenue was $142.2 million, compared with $135.9 million in the third quarter 2000.
Some of Wackenhut's growth will come in managing federal prisons, where populations continue to grow. Last year, the number of prisoners entering the system jumped by 9.4 percent over 1999, or more than 200 additional prisoners a week, according to the U.S. Department of Justice.
To handle the growth, the government has proposed three 1,500-bed prisons, the contracts for which Wackenhut is competing.
Wackenhut also has begun to manage health service, psychiatric care and sexual offender facilities as a hedge against the cyclical nature of the prison business.
It will derive about $40 million to $50 million of its projected $541 million in revenue in 2001 from managing non-prison facilities, McDonald said.
It has a contract to operate a state psychiatric hospital in Pembroke Pines for $30 million annually. It won a contract valued at more than $30 million a year to operate a center for sexual offenders in Arcadia, although a competitor has protested the award. It also must still negotiate the contract's final value.
First Analysis' McDonald points out that non-prison revenue won't amount to much this year, and he is concerned about Wackenhut venturing too far from its core business. But he concedes that it helps to have a hedge.
"It's good to have several avenues for growth, especially in the large prison management business, with its pockets of weakness in the state markets," McDonald said.