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“Hope is a dangerous thing. Hope can drive you crazy.”
- The Shawshank Redemption
Remember the Longest Yard (Mean Machine….Mean Machine…Mean Machine)? Cool hand Luke (mmmm…..eggs)? Monster’s Ball? What do all these flicks have in common? No not Halley Berry's hot ass. They are all prison movies and every one knows that prisons are big money. Now that they are in the private sector it’s money, more money!
Today I bought WHC (Wackenhut Corrections) at 24.11. I will sell it in 4 to 6 weeks at 27.73. Here’s why I like WHC:
WHC’s stock is up 187% in the last 12 months yet its PE is only 9.2 (including the one time earnings gain). Bargains galore! You like price momentum?? WHC’s R^2 for the last 12 months is 0.95! That’s a Rembrandt! Also take into account the stocks beta of 1.08, which indicates that if the market continues to climb, WHC will go right along with it. If the market stumbles, however, WHC’s low PE and rock solid cash flow will protect its downside. Why? For now, though, the U.S. penal system continues to put away more people than it has room for which would continue to provide some steady returns for investors for a while.
Even more interesting is if we assume initial earnings of $47.5 million grow at a rate of 15.00%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $475 million. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $839 million. To complete the calculation we add these two figures together, subtract the long-term debt for WHC ($305 million), and divide by the outstanding shares (9.33 million) to get a per share intrinsic value of $108.13.
The private prison operator should benefit from rising jail populations and state budget constraints. Who says crime doesn’t pay? Wackenhut stands to benefit from these trends. WHC controls approximately 22% of all beds under private contract. WHC is also pursuing contracts for 1,000 mental health beds (Juicy Fruit?) in multiple states, and should be well positioned-to win some of this new business.
Tough-on-crime state and federal sentencing laws keep offenders locked up for a long time. Current demographics are also bullish for the corrections industry. Convicted criminals 18 to 24 years old make up a big percentage of new inmates. Just watch what “the Terminator” does in California, where a lot of new criminals reside!. “Talk to the hand!”. New convicts don't have enough beds: The federal system was 33% overcapacity last year. And with states and the federal government financially strapped, the public prison-building spree of the 1990s is a thing of the past. Private-sector corrections outfits such as WHC can run prisons for 10% to 15% cheaper than the government can. Actually the real secret is that they water down the mashed poatatoes. This reduces their food budget. Quite frankly, outperforming the government isn’t overly difficult.
Demographics will also likely contribute to inmate population growth. Males between the ages of 18 and 29 are more likely than other groups to be locked up. Their number, which shrank from 1991 to 1996, has jumped to 14 million today from 12.6 million in 1997. A half million more are expected by 2005. We can always put these prisoners on a plane and send them to Afghanistan and Iraq, but there’s no guarantee that they won’t find their way home.
WHC has seen their top line revenue growth expand 20% per year. While companies in other industries are forced to cut back to hold up their earnings, WHC just watches the money pile in. All this over a P/E of 9.2. It’s a growth company, it’s a value company, it’s a candy mint, it’s a breath mint. Seriously, its 15% Return on Equity speaks for its successful model.
I prefer WHC over the other corrections for profit companies because Wackenhut Corrections is the only outfit with significant operations outside the U.S. This gives WHC a leg up to export their business model to other countries facing similar increase in demand. You think it’s all Pollyanna oversees? WHC has 49 facilities in the U.S., Australia, South Africa, New Zealand, and Canada, with a potential capacity of 38,000 beds.
WHC performed the financial steal of the century last July. (steal / prisons bahaha I murder me). Prior to July 2003, the company was a 57%-owned subsidiary of Group 4 Falck, a Danish security and correctional services company, which acquired The Wackenhut Corp. (WHC's former parent) for $33 a share in cash in May 2002. In July 2003, Wackenhut Corrections repurchased all 12 million of its common shares owned by Group 4 Falck. Management knows that their future cash flows will be HUGE and with the stock trading at a steep discount, they felt this would be a handsome investment combined with the fact management now has more freedom to pursue its own strategy. The reward to shareholders will be tremendous, as the EPS will skyrocket despite the increase in LT debt. It’s like buying a summer house on the water that you can’t afford. If the interest rates are low enough, the equity on the appreciation of the asset will cover your interest expense.
Before we get to wacky about the Wackenhut name, you need to know that they will be changing their name to the GEO Group. When I was in college, I had a friend named Geo. He was wicked little but he always liked to get in fights. Once on Locust Walk, he got punched in the head by one of the defensive tackles on the football team and he went flying down Locust Walk. I guess you had to be there. Anyway, Geo is a millionaire now.
WHC’s third quarter numbers were HUGE. Here’s what the head warden had to say. George C. Zoley, Chairman and Chief Executive Officer of WCC, said, "We are very pleased with the strength of our 2003 third quarter operating and financial performance. Third quarter 2003 has been an exciting and invigorating period for WCC. We feel that we are well positioned to pursue further growth and continue to enhance shareholder value." How do you like those original statements? He should have said, “Bad boys bad boys whatcha gonna do?” but what he’s really saying is “Book em Danno..lock em up and throw away the key and don’t forget to pay the warden on the way out”.
I am HUGE!!
- The Shawshank Redemption
Remember the Longest Yard (Mean Machine….Mean Machine…Mean Machine)? Cool hand Luke (mmmm…..eggs)? Monster’s Ball? What do all these flicks have in common? No not Halley Berry's hot ass. They are all prison movies and every one knows that prisons are big money. Now that they are in the private sector it’s money, more money!
Today I bought WHC (Wackenhut Corrections) at 24.11. I will sell it in 4 to 6 weeks at 27.73. Here’s why I like WHC:
WHC’s stock is up 187% in the last 12 months yet its PE is only 9.2 (including the one time earnings gain). Bargains galore! You like price momentum?? WHC’s R^2 for the last 12 months is 0.95! That’s a Rembrandt! Also take into account the stocks beta of 1.08, which indicates that if the market continues to climb, WHC will go right along with it. If the market stumbles, however, WHC’s low PE and rock solid cash flow will protect its downside. Why? For now, though, the U.S. penal system continues to put away more people than it has room for which would continue to provide some steady returns for investors for a while.
Even more interesting is if we assume initial earnings of $47.5 million grow at a rate of 15.00%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $475 million. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $839 million. To complete the calculation we add these two figures together, subtract the long-term debt for WHC ($305 million), and divide by the outstanding shares (9.33 million) to get a per share intrinsic value of $108.13.
The private prison operator should benefit from rising jail populations and state budget constraints. Who says crime doesn’t pay? Wackenhut stands to benefit from these trends. WHC controls approximately 22% of all beds under private contract. WHC is also pursuing contracts for 1,000 mental health beds (Juicy Fruit?) in multiple states, and should be well positioned-to win some of this new business.
Tough-on-crime state and federal sentencing laws keep offenders locked up for a long time. Current demographics are also bullish for the corrections industry. Convicted criminals 18 to 24 years old make up a big percentage of new inmates. Just watch what “the Terminator” does in California, where a lot of new criminals reside!. “Talk to the hand!”. New convicts don't have enough beds: The federal system was 33% overcapacity last year. And with states and the federal government financially strapped, the public prison-building spree of the 1990s is a thing of the past. Private-sector corrections outfits such as WHC can run prisons for 10% to 15% cheaper than the government can. Actually the real secret is that they water down the mashed poatatoes. This reduces their food budget. Quite frankly, outperforming the government isn’t overly difficult.
Demographics will also likely contribute to inmate population growth. Males between the ages of 18 and 29 are more likely than other groups to be locked up. Their number, which shrank from 1991 to 1996, has jumped to 14 million today from 12.6 million in 1997. A half million more are expected by 2005. We can always put these prisoners on a plane and send them to Afghanistan and Iraq, but there’s no guarantee that they won’t find their way home.
WHC has seen their top line revenue growth expand 20% per year. While companies in other industries are forced to cut back to hold up their earnings, WHC just watches the money pile in. All this over a P/E of 9.2. It’s a growth company, it’s a value company, it’s a candy mint, it’s a breath mint. Seriously, its 15% Return on Equity speaks for its successful model.
I prefer WHC over the other corrections for profit companies because Wackenhut Corrections is the only outfit with significant operations outside the U.S. This gives WHC a leg up to export their business model to other countries facing similar increase in demand. You think it’s all Pollyanna oversees? WHC has 49 facilities in the U.S., Australia, South Africa, New Zealand, and Canada, with a potential capacity of 38,000 beds.
WHC performed the financial steal of the century last July. (steal / prisons bahaha I murder me). Prior to July 2003, the company was a 57%-owned subsidiary of Group 4 Falck, a Danish security and correctional services company, which acquired The Wackenhut Corp. (WHC's former parent) for $33 a share in cash in May 2002. In July 2003, Wackenhut Corrections repurchased all 12 million of its common shares owned by Group 4 Falck. Management knows that their future cash flows will be HUGE and with the stock trading at a steep discount, they felt this would be a handsome investment combined with the fact management now has more freedom to pursue its own strategy. The reward to shareholders will be tremendous, as the EPS will skyrocket despite the increase in LT debt. It’s like buying a summer house on the water that you can’t afford. If the interest rates are low enough, the equity on the appreciation of the asset will cover your interest expense.
Before we get to wacky about the Wackenhut name, you need to know that they will be changing their name to the GEO Group. When I was in college, I had a friend named Geo. He was wicked little but he always liked to get in fights. Once on Locust Walk, he got punched in the head by one of the defensive tackles on the football team and he went flying down Locust Walk. I guess you had to be there. Anyway, Geo is a millionaire now.
WHC’s third quarter numbers were HUGE. Here’s what the head warden had to say. George C. Zoley, Chairman and Chief Executive Officer of WCC, said, "We are very pleased with the strength of our 2003 third quarter operating and financial performance. Third quarter 2003 has been an exciting and invigorating period for WCC. We feel that we are well positioned to pursue further growth and continue to enhance shareholder value." How do you like those original statements? He should have said, “Bad boys bad boys whatcha gonna do?” but what he’s really saying is “Book em Danno..lock em up and throw away the key and don’t forget to pay the warden on the way out”.
I am HUGE!!
Most Federal and State Prision systems require bids for products and or services< Wouldn"t WHC have to make a bid to supply the Beds?
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