Private Prison Companies Still Locking In On Business

Wall Street Journal
For a land of the free, the U.S. has a lot of prisoners: Over the past 25 years, our inmate population has swelled to 2.38 million, from roughly 700,000. Our incarceration rate is the highest in the world, and our federal prisons are at 137% of their capacity.
This should be good news for the private prisons that absorb the spillover from congested federal and state penitentiaries. But, alas, the recession has ruffled the economics of even law and order. Cash-strapped states are mulling measures, such as quicker paroles and earlier releases.

As a result, private-prison stocks are selling at unusual -- and untenable -- discounts to their historical multiples or value. The three biggest companies are Corrections Corp. of America, which controls 39% of private-prison beds, Geo Group, which runs 25%, and Cornell, with 10%. While their stocks have rebounded recently, they still trade at 12 to 18 times what each is expected to earn in 2010 -- compared with multiples pushing 30 before the financial crisis.
These grim valuations overlook private prisons' steady profitability, their stranglehold on a tough-to-penetrate industry and the chasm between supply and demand. Barclays analyst Manav Patnaik pegs the annual demand for new prison beds at 35,000, and the supply at just 20,000 public and private beds.
Today, budget-constrained states can ill afford the time or capital to build new facilities. And many increasingly find it cheaper to outsource part of their prison system. That explains why half the new inmates over the past year were sent to private prisons, even though less than 9% of U.S. prison beds are privatized.
Any reform that shortens sentences will hurt private prisons. But bulls say that the stocks may have already factored in much of the threat.
Case in point: Colorado wants to cut its prison population by 26%, or 6,000 inmates, over the next two years. But Signal Hill analyst T.C. Robillard doubts the state "can classify a quarter of its inmates as low-risk or near the end of their sentences." Mr. Patnaik pegs the net impact at just 1,000 beds, noting that releases will be offset by new intake.
Besides, private prisons earn steadily recurring revenue, impervious to seasons or business cycles. Customers don't defect easily to competitors. And the facilities tend to be durable, low-maintenance and quite immune to changing architectural whims.