Barclays on Private Prisons: Upgrade CXW: Prefer the Potential for a Dividend and Continued Buybacks
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Price: $33.08 -1.28%
Rating Summary:
9 Buy, 2 Hold, 0 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
Rating Summary:
9 Buy, 2 Hold, 0 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
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Barclays on Private Prisons: Upgrade CXW: Prefer the Potential for a Dividend and Continued Buybacks
Barclays analyst, Manav Patnaik, said, "While long term we continue to see more opportunities for both Corrections Corp of America (NYSE: CXW) and The Geo Group (NYSE: GEO), until state budgets show marked improvement, the materialization of the industry pipeline will likely remain very slow and frustrating (more so than we had anticipated). In this scenario, we prefer CXW (upgrading to Overweight) over GEO (downgrading to Equalweight), primarily due to CXW's lower leverage (2.4x vs. 4.8x) which provides it greater flexibility to (a) continue share buybacks and (b) potentially issue a dividend. Additionally, the 'quality' of the two near-term opportunities favors CXW, in our view."
"'Quality' of Near-term Contracts (AZ and FL) Favor CXW: (1) In AZ, with CXW offering up existing bed space, the odds of them winning at least 2,000 of the 5,000 beds are high in our view (if not more; currently expected by 12/22). For every 1,000 beds CXW would see ~$6M in EBITDA and ~$0.04 in EPS. The 'quality' is in the good portfolio management (move CA inmates to other empty sites) and immediate utilization vs. a new build for GEO (additional leverage + a 12-18 months build time). (2) While FL (delayed at least till April-July 2012) is a $240M revenue opportunity, the profitability will be lower than the managed-only margins or 8-12% (so ~$19M of EBITDA; $0.18 in EPS to GEO, $0.11 to CXW). While we think the size clearly warrants a bid, from the way expectations are positioned, with GEO expected to win this contract (since it is in its backyard), should CXW sneak in a win it would be incremental."
"Still Like GEO: To be clear, we still view GEO well positioned to benefit from the industry, and it is hard to ignore at current valuation levels (a view reflected in our price target of $22 or 24% potential upside from current levels). With the prison pipeline materializing so slowly though we could not justify a Overweight on both names; our Overweight for CXW expresses our optimism over the longer-term opportunities for private corrections."
Barclays analyst, Manav Patnaik, said, "While long term we continue to see more opportunities for both Corrections Corp of America (NYSE: CXW) and The Geo Group (NYSE: GEO), until state budgets show marked improvement, the materialization of the industry pipeline will likely remain very slow and frustrating (more so than we had anticipated). In this scenario, we prefer CXW (upgrading to Overweight) over GEO (downgrading to Equalweight), primarily due to CXW's lower leverage (2.4x vs. 4.8x) which provides it greater flexibility to (a) continue share buybacks and (b) potentially issue a dividend. Additionally, the 'quality' of the two near-term opportunities favors CXW, in our view."
"'Quality' of Near-term Contracts (AZ and FL) Favor CXW: (1) In AZ, with CXW offering up existing bed space, the odds of them winning at least 2,000 of the 5,000 beds are high in our view (if not more; currently expected by 12/22). For every 1,000 beds CXW would see ~$6M in EBITDA and ~$0.04 in EPS. The 'quality' is in the good portfolio management (move CA inmates to other empty sites) and immediate utilization vs. a new build for GEO (additional leverage + a 12-18 months build time). (2) While FL (delayed at least till April-July 2012) is a $240M revenue opportunity, the profitability will be lower than the managed-only margins or 8-12% (so ~$19M of EBITDA; $0.18 in EPS to GEO, $0.11 to CXW). While we think the size clearly warrants a bid, from the way expectations are positioned, with GEO expected to win this contract (since it is in its backyard), should CXW sneak in a win it would be incremental."
"Still Like GEO: To be clear, we still view GEO well positioned to benefit from the industry, and it is hard to ignore at current valuation levels (a view reflected in our price target of $22 or 24% potential upside from current levels). With the prison pipeline materializing so slowly though we could not justify a Overweight on both names; our Overweight for CXW expresses our optimism over the longer-term opportunities for private corrections."
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