Analyst Sees DoJ's Move Away from Private Prisons as More 'Aspirational than Attainable' (CXW) (GEO)

August 18, 2016 12:48 PM EDT
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Height securities is out with commentary on Corrections Corp. (NYSE: CXW) and GEO Group (NYSE: GEO) amid news that the Dept. of Justice is moving away from private prisons.

Analyst Daniel Hanson commented today:

While the Obama administration may desire a reduction in the use of private prisons at the federal level, we believe that this goal is more aspirational than attainable. CXW and GEO both operate facilities that are vital to the smooth functioning of the federal prison system, and they will remain integral over coming years. Currently, per a DOJ Inspector-General report, the federal prison system administered by the Bureau of Prisons (BOP) is approximately 20 percent over capacity, making it unlikely that the system could absorb a roughly 12 percent increase in its inmate population over the next five years through the elimination of private prisons.

Indeed, medium-security male facilities – the broader category that CXW serves – is 52 percent over rated capacity, per the Congressional Research Service. Approximately 19,000 inmates are housed in these private facilities, and there simply are not enough beds to accommodate them in federal facilities. In the Annual Report on Federal Prisons issued earlier this year, the Inspector General’s office noted that expenses at federally run facilities suffered from “a persisting crisis” wherein they consistently overran budget targets, while noting that for-profit prisons are fixed-cost contracts that help to contain budget overruns.

While the data are not directly comparable, the IG notes that costs for holding prisoners is about 12 percent lower at contract prisons than at federal facilities, but it subsequently concludes that the prisons do not substantially save on costs. This conclusion is at odds with reality, as is the assertion by DOJ that the BOP could accommodate the additional prisoners without hiring additional personnel. Congressional appropriators have already called upon BOP to reduce its budget, saying that the BOP does not sufficiently justify its expenditures and that costs must fall over coming fiscal years. The IG has noted, “The rate of growth in the BOP’s budget was almost twice the rate of growth of the rest of the Department. The BOP currently has more employees than any other Department component, including the Federal Bureau of Investigation (FBI), and has the second largest budget of any Department component, trailing only the FBI.”

We would also remind investors that the larger state-level contracts are arguably more important for the companies in question, and this DOJ pronouncement has no effect on state policy.

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