I remember attending a investment conference last summer and one of the best presentations I heard discussed was the corrections industry and how it was a smart and uncommon place to put your money.
CXW was one of the top selections for its steady growth and defensive nature of its business. Economies may ebb and flow, but the number of incarcerated Americans is steadily growing according to the U.S. Department of Justice.
Back in November, 2011 one of my colleagues noted CXW as a great value play after the company offer some strong guidance earlier that month. The stock has since risen over 25% and looks to be building up steam. In addition, the company announced a quarterly dividend of $0.20 per share beginning in June 2012.
Company Description & Developments Corrections Corporation of America or “CCA” is the nation’s leading provider of correctional solutions to federal, state and local government. They are the 5th largest corrections network in terms of beds. CCA employs over 17,500 people and has been around for almost 30 years. Their detention network currently houses approximately 75,000 offenders and detainees in more than 60 facilities around the US.
44 of the 60 facilities are company-owned and can house more than 80,000 in total. CCA currently partners with all three federal corrections agencies (The Federal Bureau of Prisons, the U.S. Marshals Service and Immigration and Customs Enforcement). It also has partnerships with about half of the states in the US and more than a dozen local municipalities. They recently bought the Lake Erie Correctional Institution, which is a 1,800 bed facility for 73 million back in September of 2011.
One of the reasons for CCA’s advantage in this economy and its 500% growth since the late 90’s is that they are able to acquire prisons at a (very) good price from cash-strapped states who can’t manage their budgets and keep their prison systems in the black.
Their strategy seems to be working; on February 9th, CCA reported earnings of $0.41 versus expectations of $0.37, sending shares higher.
More recently, the company reaffirmed its full-year 2012 earnings per share guidance of $1.60 - $1.70 and first-quarter 2012 earnings per share view of $0.32 - $0.33. The estimates will exclude charges of $1.4 million - $1.9 million, the company expects to report during the first quarter of 2012 in connection with refinancing activities.
Financial Profile CXW is a smaller mid-cap (2.54 billion) company that is trading at about 15.5 times forward (expectations for next quarter) earnings. CXW recently moved back to a Zacks Rank 1 strong buy on February 14th, 2011
Corrections Corp. reported a quarterly sales increase of only 1% at their last earnings report but saw an 11% jump in EPS for the same period. Annual sales were up 2% compared to (fiscal) FY2010 with total sales of roughly 7.74 billion in FY2011. Thier earnings increased from $1.39 in FY2010 to $1.54 in FY2011 (diluted) and are expected to earn $1.64 in FY2012 according to the Zacks Consensus Estimate.
Earnings Estimates CXW saw funds from operations per share increase to $0.82 from $0.74 last year and noted that revenue increased to $439.69 million from $432.20 million last year.
Management revenue from federal partners increased 5.9% to $192.6 million generated in Q42011 compared with $181.8 million in Q42010. State partner revenue decreased 1.8% to $216.8 million in Q42011 compared with $220.7 million during the fourth quarter of 2010 due primarily to a reduction of inmate populations from the state of California at a certain facility.
Corrections Corp. has surprised analysts to the upside 4 quarters in a row at an average of almost 8%.
Of the 6 analysts who cover CXW, the consensus is for the company to grow earnings by 7% in the current year (FY2012) and roughly 7% in FY2013.
In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates higher than they were 90 days ago for the next quarter as well as FY2012 and FY2013, the current quarter has seen some downward adjustments.
The company seemed upbeat on their last conference call; CEO Damon Hininger, stated, 'As we begin 2012, we are preparing to commence operations at our Jenkins Correctional Center, which we expect will be completed and begin ramping later this quarter. Additionally, we are very pleased to have added the states of Ohio and the Commonwealth of Puerto Rico to our list of government partners.'
Market Performance & Technicals Corrections Corp. has picked up momentum with the markets in the past 3 months breaking out of the channel it was stuck in for the last quarter of 2011. CXW has a beta of about 1, but has seemed to be slightly more volatile than the broad market in the past several months since eclipsing its channel resistance.
CXWsaw added strength once it broke above the 50 and 200 day moving averages, which occurred back in January in fairly quick succession. It currently remains above both the 50 and 200 day averages of $22.92 and $22.12 respectively.
Given the sharp move above the averages, my concern would be an equally volatile drop if the stock fell below them. To aid in the prevention of a sharp drop, the stock has built a good support base (sticky price area) around the $24 level.
CXW matched the S&P 500’s performance but managed to outpace it by over 8.5% in the past 3 months during its recent rally. The stock remains in a bullish trend and has maintained its momentum in the past month, leading the index by about 5%.
Given the stock’s relatively inexpensive P/E multiple, stable revenue source and need for more prison space, we could see more upside from Correction Corp of America in 2012.
Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.
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