COMPANIES THAT RUN PRISONS MAY BE POISED FOR A BREAKOUT
By Brian Edwards and Jill Ward
Chicago Tribune Sept. 6, 2000
Wall Street has thrown the book at companies who manage federal, state and county prisons. The past year saw many of these stocks relegated to the slammer, losing 40 to 80 percent of their value.
But some analysts say investors in the companies that house jailbirds may be in for some good news for a change. In fact, some Wall Street experts judge prison stocks as undervalued and attractive for their growth potential. If investors are patient, they may be rewarded.
Why the downturn? Several negative factors have punished these stocks. The slowdown of state procurements, delays in federal commitments, because of contracting issues, damaging media and lack of financing have all driven stock prices down. The strong economy has also helped push the crime rate to all-time lows, even though prison populations are at all-time highs.
It's no secret that the major companies served some hard time last year. The stock prices of both Wackenhut Corrections Corp. (New York Stock Exchange: WHC) and Cornell Companies (NYSE: CRN) lost about 60 percent of their value within the past year. Prison Realty Trust NYSE: PZN) received the stiffest penalty: Its stock is more than 80 percent off its 52-week high.
But these companies may soon be heading up. The industry is counter-cyclical: In poor economic times, offender management companies thrive as the crime rate goes up. Analyst Howard Halpern of Taglich Brothers, Inc. in New York City believes the industry's recent financial downturn represents an opportunity for investors to buy while prices are low.
"I'm not really sure why investors haven't recognized the importance of what (these companies) do," Halpern said. "The rate of growth is swelling because people are staying in jail for longer periods due to truth in sentencing and mandatory sentences."
That translates into more profits for the companies who incarcerate criminals. Total public expenditures for incarceration currently exceed $40 billion annually, and analysts expect that prisons will be home to over 2 million inmates by 2001. These factors combined with the trend toward longer sentences and the cost savings associated with privatization spell out increased growth.
Privatized adult offender management is a $2 billion industry driven by government contracts -- and competition is slim.
The industry as a whole has three segments: adult secure corrections, juvenile corrections and community corrections.
Companies do more than just manage prisons, though. Prison companies also offer construction, inmate health care, food service, education and training, and security monitoring. In the United States, only six major companies compete for the largest contracts.
In 1999, new construction and contracting guidelines conspired to create a major slowdown in the number of contracts awarded. Industry experts expect the trend to reverse this year and predict a major procurement from the Federal Bureau of Prisons as prisoner populations increase. > Recently, Wackenhut and Cornell were awarded contracts to manage prisons in Texas and in Arizona, and more are pending.