Private prison stocks haven’t performed well in the past year. Will a recent executive order (EO) do further damage to the sector? I’m talking about the one that bans new federal contracts with private prison companies.
This move is no surprise. Barack Obama issued a similar order during his last year in office. However, former President Trump quickly rescinded Obama’s order shortly after taking office. While this action temporarily boosted stocks in the space, prison stocks have trended lower recently.
Federal-level correctional facility contracts make up a good share of the revenue mix for the two leading names in this space. Yet, for either one, the number of sales that come from Bureau of Prisons (BOP) and/or U.S. Marshals contracts amount to less than 25%.
State and local governments make up a larger share of their sales. Their respective business with the Immigration and Customs Enforcement, or ICE, makes up a large share as well. And, while this business has been controversial, it wasn’t included in this executive order.
To top it all off, this change will take years to play out. Investors may be overestimating the damage Biden’s EO will do for prison stocks. Granted, reforms could speed up, impacting their ICE and state/local operations, but these three private prison stocks could surprise going forward:
Private Prison Stocks: CoreCivic (CXW)
As America’s largest operator of private correctional facilities, it’s understandable why investors are now bearish on CXW stock. Yet, while its future federal business has evaporated, things are still humming along when it comes to state-level contracts.
For example, CoreCivic recently inked a 30-year, $3 billion deal to build and operate two prisons for the State of Alabama. Per a Motley Fool commentator’s numbers, this prison operator generates 37% of its revenue from contracts with state and local governments.
Also, 29% of revenue comes from contracts with ICE. As I mentioned above, these kinds of facilities were excluded from the executive order.
Don’t get me wrong, this EO is bad news for CoreCivic stock since 22% of its sales come from BOP and U.S. Marshals contracts. With shares down more than 57% in the past year, though, investors may have more than priced-in the eventual loss of this business. For some contrarian investors, shares at today’s prices (around $8 per share) may be a worthwhile opportunity.
The GEO Group (GEO)
As with CoreCivic, The GEO Group may only see moderate damage from the private prison EO since only 12% of its top line in 2019 came from BOP contracts; 11% came from U.S. Marshals contracts.
This situation would’ve been much worse if the EO phased out private ICE facilities as well. A full 22% of its 2019 sales came from contracts with that agency.
While I’m taking a more optimistic view of how this recent action will affect private prison stocks going forward, I concede that this may only be the start of large-scale changes to the correctional facility contracting business.
Private ICE centers didn’t start with Trump, but the industry exploded during his term in office. Biden promised to close these private facilities on the campaign trail. Yet, given he didn’t include these facilities in this order, perhaps his actions as president will differ from his positions as a candidate.
So, what’s next for GEO stock after falling more than 50% since last February? Sure, just because Biden hasn’t banned private ICE facilities now, doesn’t mean he won’t phase them out down the road. With the specter of this happening possibly priced into shares, this may be an interesting high-risk, high-rebound potential stock.
Palantir (PLTR)
CoreCivic and GEO are the only pure-play U.S. prison stocks out there. There are several large companies that provide telecom and other services to federal and state-level facilities, but none of them trade publicly. Instead, most of them are private-equity owned.
Yet, there’s one public company with some exposure to possible changes: Palantir. The big data company provides solutions to a variety of federal government agencies, but its work with ICE has gotten it the most press. Bad press, that is.
If Biden continues to reform current policies, ICE contractors like this one could see some downside. Or will they? Biden may be dismantling Trump’s physical border wall, but he may replace it with a technological border wall. That is to say, increased use of surveillance technology. That bodes well for Palantir.
I wouldn’t buy PLTR stock on this potential alone. This richly-priced stock could fall if growth falls short of expectations.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
