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  • mcprison mcprison Apr 16, 2002 10:32 PM Flag

    Bloomberg on WHC

    Bloomberg News

    April 15, 2002, Monday 2:14 PM Eastern Time


    BYLINE: John Dorfman in Boston at or (617) 964- 2026
    through the New York newsroom. Editors: Braitman, *Hays

    (Commentary. John Dorfman, president of Dorfman Investments in Boston, is a
    columnist for Bloomberg News. The opinions expressed are his own. His firm or
    its clients may own or trade investments discussed in this column.)

    Boston, April 15 (Bloomberg) -- Like an expert butcher slicing a salami, the
    Federal Reserve cut interest rates over and over again last year.

    Its forceful action of 11 cuts in 2001 probably kept the recession from
    getting worse than it was. Now that the economic slowdown may be over, most
    investors expect the Fed to raise rates this year.

    Rising rates are generally bad news for stocks because they retard economic
    activity and make bonds an attractive alternative. Perhaps no stock is
    completely immune from rising rates, but stocks of debt-free companies are less
    affected than most.

    Three debt-free stocks that I like in this environment are Wackenhut
    Corrections Corp., United Fire & Casualty Co. and Jakks Pacific Inc.

    Behind Bars

    Let's look first at the low-debt stocks. Wackenhut, with headquarters in Palm
    Beach Gardens, Florida, is one of the two largest U.S. companies that operate
    prisons. It has facilities in the U.S. and internationally.

    The company is 57 percent owned by Wackenhut Corp., a security company that
    last month agreed to be acquired by Group 4 Falck A/S of Denmark. Wackenhut
    Corrections had its first public stock sale in 1994 and has earned a profit each
    year since.

    The company earned a respectable 15 percent on common equity last year.
    Shares sell for 14 times earnings and 0.5 times revenue, which is pretty cheap.
    Analysts expect earnings of $1.01 this year.

    Scandals? Sure, Wackenhut Corrections has had them, as is typical for prison-
    related organizations. Whether prison guards are public or private employees,
    there will be occasional riots, escapes and allegations of brutality or sexual
    misconduct -- some of which will be true.

    Overall, however, I believe private companies such as Wackenhut can run
    prisons at least as well as most states, counties or municipalities, which are
    often tangled in bureaucracy. Private prisons are a growing business, as
    witnessed by the growth rates posted by Wackenhut Corrections over the past five
    years -- an average of 19 percent a year in earnings and 32 percent in revenue.

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