Canaccord Genuity Sees 'Materially Less Risk' for Prison Stocks Under President Trump - (CXW) (GEO)

November 21, 2016 3:05 PM EST
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Canaccord Genuity released its bi-weekly prison update today. Inside the report, the firm describes the market as having "materially less risk" when it comes to contract renewals, as a result of a Donald Trump presidential victory. Under the current plan, the DOJ had was to dramatically scale back/eliminate BOP contracts upon renewal. However, it is possible that a new attorney general, under a Trump organization, may reverses the plan. Along side, the potential renewals, Canaccord is expecting more ICE contracts to be in play, considering Trumps potential immigration policies.

Canaccord Genuity analyst Ryan Meliker commented, "Following Donald Trump's presidential victory, we now see materially less risk to contract renewals and the overall private prison REIT business models. A Trump victory screens favorably for every federal jurisdiction, and we believe it’s possible that a new attorney general reverses the current plan to cancel BOP contracts upon renewal, though we continue to assume BOP contracts expire upon renewal. As such, we believe our estimates for both GEO and CXW may prove to be conservative. The stocks screen cheap regardless, trading at EBITDA multiples close to 1.5x below their averages and at high AFFO yields. Thus, despite the recent run-up in the stocks, we see more upside to both stocks, but prefer GEO at present given CXW's upcoming dividend cut, as well as CXW's heavier EBITDA-exposure to California in light of recent legislation."

Over the past two weeks, The GEO Group's (NYSE: GEO) stock was up 28.2%, while Correcitions Corp. of America (NYSE: CXW) was up 38.9% primarily due to Trump's presidential election win. Over the same period, the RMZ was down 0.4%. Canaccord believes that volatility in the market should begin to fade, as the major headlines and political environment offer more clarity.

Meliker continued in a note, "The Cibola County facility has already won a contract with ICE, and given the month extension from the previous BOP contract at Cibola County, not only did CXW seamlessly transition the contracts, but ICE contracts tend to carry higher per diems than BOP. As such, CXW is likely to benefit from this trade off. Additionally, we have seen that CXW is looking to employ more correctional officers in Youngstown, OH where the company’s Northeast Ohio Correctional facility is located and discussed in the article. The 2,016 bed, USMS-contracted facility is presently only 31% occupied as of 3Q16, and CXW would be able to greatly increase the usage by signing an ICE contract. Furthermore, GEO has also addressed the 5,000 bed need, and said that they believe ICE would be interested in some of both CXW and GEO’s idle capacity. We believe the shortage in long-term ICE beds could present a growth opportunity for both companies, especially in light of the president-elect’s immigration policy plans."

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