GEO Group – Far too Significantly Pessimism Supplies Opportunity
– By Praveen Chawla
The GEO Group, Inc. (NYSE:GEO) is a jail operator structured as a authentic estate expense have faith in (REIT). It describes itself as specializing in the structure, funding, advancement and procedure of protected services, processing facilities and neighborhood re-entry centers in the United States, Australia, South Africa and the United Kingdom.
GEO’s globally operations consist of the possession and/or management of 118 facilities totaling approximately 93,000 beds, which include idle facilities and initiatives less than advancement, with a workforce of up to roughly 22,000. Most of its revenues and revenue are derived from the U.S.
GEO’s mentioned mission is to acquire general public?private partnerships with govt businesses around the globe supplying enhanced rehabilitation and community reintegration courses for the prisoners contracted underneath it. GEO and CoreCivic (CXW), the two providers that regulate federal prisons in the U.S., by yourself mix for 17 agreement services that accommodate close to 13% of the Federal Bureau of Prison’s (BOP) full capacity of approximately 9,800 inmates. The BOP represents 14% of Geo’s 2020 earnings.
The firm’s inventory cost has been crushed because of the latest govt purchase to the Federal Bureau of Prisons to not renew contracts with personal prison operators heading forward. Even more, due to social pressures and ESG mandates, a lot of monetary establishments have mentioned that they will withdraw from lending cash to personal prison operators.
On April 7, GEO suspended its quarterly dividend payments, with the objective of maximizing the use of dollars flows to repay debt, deleverage and internally fund development, and its inventory cost collapsed further. It is probable that GEO may possibly convert from an REIT to a C-Corp to navigate its recent funding challenges and impending non-renewals.
The following charts give the firm’s earnings and net working profits distribution, respectively.
Geo group is really hugely leveraged with personal debt of $9 billion and equity of only $2.1 billion. The marketplace capitalization is only $690 million.
The next chart demonstrates the schedule of personal debt payment.
$1.7 Billion of credit card debt arrives thanks in 2024. For that reason, GEO has about 3 decades to determine out how to reschedule or repay this bolus of maturing debt. That will in turn count on GEO’s skill to sell or re-lease the houses which are not currently being renewed by the federal federal government.
I feel the enterprise has sufficient to time to sell or re-lease the properties which the BOP is not renewing. There is a superior possibility the BOP ifself will purchase the attributes from GEO, or just hire the assets and operate it itself, as it would be more affordable that making a new custom facility. We will just have to hold out and see how the chips slide in the quarters ahead.
Valuation
I imagine a excellent way to price the business is by the projected FCF technique. The approach works by using a mixture of 6 a long time of normalized cost-free money stream and 80% of e book value.
It is created for corporations which have relatively erratic hard cash stream from year to year. This process indicates a value of $16 a share and displays sizeable margin of security as the stock value is down below $6 presently. It indicates a 150% upside.
Summary
Looking at the chart underneath over the previous 20 decades, GEO has never ever traded at such a discount from its projected FCF worth. Clearly, the stock industry is expecting GEO to be at significant danger of insolvency over the up coming a few many years. While that pessimitic state of affairs is not unreasonable, I imagine there is a larger opportunity that GEO will muddle by way of by advertising off unneeded property, and hence this industry despondency signifies an chance for traders with a extremely extensive expression horizon and a high tolerance for chance.
Disclosure: The author owns stock of The GEO Team Inc.
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