This Company Performs Well During Recessions

| December 5, 2008 | 0 Comments

It’s official.  The National Bureau of Economic Research waved their magic wand and decreed the end of economic expansion.  The official proclamation calls the recession start date as December 2007.  I just don’t understand what took so long for them to figure it out?

I mean really.  Twelve months to decide we’re in a recession… I was calling a recession months ago.

So what happens next?  Now that we’re officially in a recession there’s only one big question:  When does the recession end?  Now everyone’s guessing.

Here’s the thing.  Nobody’s going to be perfect in predicting the end of the recession.  But the perception we’re exiting one is key to the next rally in the market.

But, we’re getting ahead of ourselves.

We can make money in a recession… from the recession.

I’ve found a business that’s not only recession proof but thrives in a recession.  Here’s the thinking… Recessions and other periods of economic downturn naturally lead to increased crime rates.  According to the Chicago Tribune, in the last 60 years, crime rates have increased during every recession.

It’s sad but true.  Higher crime rates mean an increasing prison population.

Now, it’s hard to celebrate having more people in prison.  However, lots of people in prison mean big profits for a few select companies.  See, a significant portion of the US prison population is housed in privately owned correctional facilities.  And some of the companies running these businesses are publicly traded.

Before I tell you about these companies, consider these facts.

This year more than 1.57 million people will be housed in privately owned prisons.  Ten states are expecting their prison populations to increase by 25% between 2006 and 2011.

Here’s the kicker… Its estimated private prisons operate more efficiently than their government run counterparts.  15% more efficiently.

The private prison business is expanding.  There are three public companies benefiting from the trends in the prison system.  All three prison management companies are doing well.  But which one should we buy?

Cornell Companies (CRN) has a market cap of $315 million.  In the last twelve months they’ve done $377 million in revenue and have a P/E ratio of about 15x.

Geo Group (GEO) is the second largest private prison management company in the US.  They’ve got a market cap of $869 million and did just over $1.0 billion in revenue.  They have a P/E ratio of 16x.

Corrections Corp of America (CXW) is the 800lb gorilla in the industry. They have a $2.0 billion market cap, recorded more than $1.5 billion in revenue and they have a P/E ratio of just over 14x.

Choices, choices, choices… which one would you buy?

Of the three, I’d pick the big guy.  I’d select the 800 pound gorilla in the industry.  I think they’re poised to outperform everyone in the group.

As it now stands, they have the best financial metrics… but you had to dig a bit deeper to uncover the good stuff.

CXW has really strong gross margins, 28%.  That’s higher than the other two companies.  Operating margins are even better.  They post a robust 18%.  It’s double the gross margins of GEO, and more than 15% higher than CRN.

Here’s the clincher.

Despite all three companies having relatively close P/E ratios, CXW has the lowest PEG ratio.  With a PEG ratio of 0.75x they’re significantly undervalued on a growth basis.  If I had to pick one of the three companies my choice would be CXW hands down.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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