Prison Operators Fall On Concerns Over State Budget Cuts

Wall Street Journal
NEW YORK (Dow Jones)--Shares of private-prison operators fell Thursday after one of the leading companies, Corrections Corp. of America (CXW), said it may lose revenue and two prisons should the proposed Arizona state budget pass, eliminating the state's out-of-state-prisoner system.
Corrections Corp. said the proposed budget could lead to the loss of two contracts it has in Arizona, valued at about $56.5 million last year, and lead it to close the facilities in Colorado and Oklahoma that house the Arizona inmates. The company is expected to have $1.67 billion in revenue for 2009, according to Thomson Reuters.
Its shares recently tumbled 11% to $20.17 in recent trading on nearly three times the average trading volume amid a broad market downturn. The stock has now lost 18% so far this year, after the company was also notified earlier this month it had lost out on a large part of a federal contract.
Meanwhile, competitor Cornell Cos. (CRN) also dropped, sliding 7% to $22.71 in recent trading.
Macquarie Securities analyst Cooley May said Cornell would also lose about 1,750 inmates from the proposed budget cuts in Arizona.
And Geo Group Inc. (GEO), a third prison operator, also fell 4% to $20.25.
Representatives from the companies weren't immediately available for comment.
The housing of prisoners out-of-state can save state governments money, but also can look like low-hanging fruit for strained budgets this year, making Arizona's decision a concern for the whole industry, even as analysts downplayed its effect.
SunTrust Robinson Humphrey analyst Tobey Sommer said some states may follow Arizona, as political pressure builds to create prison jobs in-state, but that eventually this could lead to increased private demand down the line, because state prisons will become overcrowded.
"This behavior is exactly what creates the positions going forward," Sommer said. "There was a lot of demand after the last recession and public companies ended up taking a lot of market share.
Corrections Corp. said in its release that its contracts for Arizona prisoners are for two facilities, the Huerfano prison in Colorado and the Diamondback prison in Oklahoma. The contracts for those are set to expire Mar. 8 and May 1, respectively, and if not renewed, the prisons would likely be shuttered.