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(Updated - August 18, 2016 3:28 PM EDT)
Canaccord Genuity analyst Ryan Meliker commented on Corrections Corp. (NYSE: CXW), and GEO Group (NYSE: GEO) Thursday after shares collapsed in the wake of reports indicating that the Justice Department's plans ending the use of private prisons on BOP contracts. In the analysts' view, while clearly negative news, the share reaction was "overdone."
"While this is no doubt negative news, the intraday stock reaction seems like over kill," Meliker. "For GEO, at around the current price, the stock is trading at close to a 20% free cash flow yield and CXW is close to 15%. Additionally with only ~11% BoP risk to GEO and 9% to CXW, the massive falloffs in the stocks imply that the risk will spread to other federal, state and local jurisdictions. While this is possible, we believe it is unlikely. As such, we think today's stock action is more based on fear than actual cash flow risk."
The analyst added, "The DOJ plan notes that there are 13 private prisons run by companies like GEO and CXW. It does not impact state contracts, ICE contracts or US Marshall contracts. GEO has 11% revenue exposure to the BOP when excluding the halfway house business (15% with it, but halfway houses are a purely private business). CXW has 9% revenue exposure to the BOP .... The plan is not expected to be enacted overnight. The plan calls for the BoP to not renew contracts as they mature. Deputy Attorney General Yates said that the Justice Department would not terminate existing contracts but instead review those that come up for renewal over the next five years."
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