Corrections Corporation of America (CXW): Profit from the busy prison business

By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month Report

From Cabot Wealth Advisory 5/1/08  Sign up for free Cabot Wealth Advisory e-newsletter

Last week we learned that while the U.S. had about 5% of the world’s population, it has about 25% of the world’s prisoners. I think that’s excessive, and I believe the biggest reason may be the War on Drugs, which, just like Prohibition, makes criminals of people trying to fill a market demand.

If I were president, I’d take steps to address this problem, ideally by legalizing many drugs and taxing their sale in the same way we tax tobacco and alcohol. But I’m not going to be president, and I don’t see any of the main contenders for the office thinking this way, so it appears that the prison system will remain very busy.

The U.S. federal government is the largest operator of prisons in the country. After that come three states, Texas, California and Florida. And after them comes Corrections Corporation of America (CXW), the company that invented the privatized prison industry in 1983 and now has over 50% of the market.

Corrections Corp. operates about 72,500 beds in 65 facilities, housing and treating men, women and children at all levels of security. Its biggest customer is the Marshals’ Service, followed by the Bureau of Prisons and then Immigration and Customs Enforcement. It serves nearly half the U.S. states, and its contract renewal rate is 95%. The company has a good, if uneven, record of long-term growth. Revenues in 2007 were $1.48 billion. Earnings were $1.07 per share. In 2008, $1.25 is forecast, and in 2009, $1.50.

The stock is currently trading around 26, giving it a price/earnings ratio of 23, and just 20 on future earnings. So the valuation seems fair. It’s a not a dirt-cheap value stock, but neither is it a high-risk growth stock. Finally, the chart says this is probably a decent buying point.

After peaking at 33 last July, the stock corrected to 24 in August and then touched 23 this February, in what was almost certainly a final wave of selling. Since then the stock has spent most of its time in the upper-20s. I think buying here, while it’s trading between 25 and 27, is highly likely to pay off in the year ahead.

Tim LuttsTimothy Lutts

President, Chief Investment Strategist, Editor of Cabot Stock of the Month

Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.