As austerity measures start to bite, crime rates are likely to rise. If burglaries jump by, say, 50% – as they did during the last recession – a mini-boom could be on the cards for private custody operators such as Geo Group. Geo has a 23% share of the global prison market. It manages 57 facilities encompassing 52,800 beds in the US, Australia, South Africa and the UK. The firm provides a range of services, including the design, construction and operation of jails for governments around the world.
Yet this is only the tip of the iceberg. The US market is worth $65bn per year, yet private operators account for less than 10% of that. And their share is even lower across the rest of the world.
One of Geo’s most attractive features is its consistent revenues, which it generates from long-term contracts with a typical renewal rate of 90%. Yet, perhaps because its turnover is almost guaranteed, Wall Street seems to have labelled the stock “dull and boring” and simply cast it aside. But they may be missing a trick here.
Geo Group ( NYSE: GEO
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Prospects seem bright, with three new facilities incorporating 4,325 new beds set to open by the second quarter of 2010, as governments seek out private companies to fill their funding gaps.
Admittedly, the extra capacity will temporarily dilute the firm’s 94.6% occupancy levels at neighbouring sites. In fact, this is one of the reasons why its 12% Ebita margins are 6% below its major rivals. However, once the latest expansion has been bedded down, profitability should improve substantially.
As far as the numbers go, Wall Street is pencilling in 2010 revenues and underlying earnings per share of $1.1bn and $1.42 respectively. This puts the stock on a forward p/e ratio of 12.9 times. Although that isn’t cheap, push the clock forward three years and I suspect the business could deliver earnings of well over $2 per share. That in turn equates to a forward multiple of less than ten.
Possible hazards include declining state budgets and net debt of $517m. And there is a good chance that fresh capital may be required to fund expansion plans. Furthermore, UK investors should factor in foreign currency risk, and the fact that the group is exposed to the usual pitfalls associated with bidding for, and then running, government contracts.
That said, with demand for prisons set to rise, and with more jails being outsourced to private operators, it’s certainly time to bag some shares.
Recommendation: SPECULATIVE BUY at $18.29
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments