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You May Have Been Looking At The GEO Group, Inc. (NYSE:GEO) All Wrong

Simply Wall St

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The GEO Group, Inc. is a US$2.6b mid-cap, real estate investment trust (REIT) based in Boca Raton, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. Below, I'll look at a few important metrics to keep in mind as part of your research on GEO.

See our latest analysis for GEO Group

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much GEO actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For GEO, its FFO of US$274m makes up 48% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NYSE:GEO Historical Debt, June 5th 2019

In order to understand whether GEO has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take GEO to pay off its debt using its income from its main business activities, and gives us an insight into GEO’s ability to service its borrowings. With a ratio of 10.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GEO 10.04 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

Next, interest coverage ratio shows how many times GEO’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 1.83x, GEO is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

In terms of valuing GEO, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. GEO's price-to-FFO is 9.5x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.

Next Steps:

GEO Group can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for GEO:

  1. Future Outlook: What are well-informed industry analysts predicting for GEO’s future growth? Take a look at our free research report of analyst consensus for GEO’s outlook.
  2. Valuation: What is GEO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GEO is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.