As observed by the media, prison stocks have gained wonderfully since the recent U.S. presidential election. CoreCivic Inc. (CXW, Financial), formerly Corrections Corp. of America, should be worth a look.
Earnings performance
The $4 billion diversified government solutions REIT-structured company delivered its fourth quarter and fiscal 2016 results early February. CoreCivic reported a 3.2% increase in sales to $1.85 billion and a 0.9% profit decline to $220 million for 2016.
Profits were brought down collectively by a $4 million restructuring charge, which helped raise operating expenses by 2.7%, and a 36% increase in interest expenses.
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"The final quarter of 2016 was exceptionally busy, with many significant accomplishments of which we are proud. During the quarter we formally launched the CoreCivic brand, which more appropriately reflects the range of solutions we can provide, substantially completed the expansion of our Red Rock Correctional Center, entered into two new contracts with Immigration and Customs Enforcement to help address their emergent bed capacity needs and extended our contract with the Federal Bureau of Prisons at our McRae Correctional Facility, to name a few of those accomplishments.
"We see many opportunities to work with new and existing partners to deliver real estate solutions that address each partner's unique needs, and we have the expertise and flexibility to deliver those solutions in an innovative and cost-effective manner." – Damon T. Hininger, CoreCivic president and CEO
Share price rose 5.2% compared to 0.58% gain in the Standard & Poor's 500 index.
Total return
CoreCivic has severely beaten the S&P 500 index this year with 38.7% total return vs. 7% for the latter, according to Morningstar data. In a five-year time frame, the company still outperformed the S&P 500 with 14.3% vs. 14.1%.
Valuations
CoreCivic currently trades at some discount relative to its peers. According to GuruFocus data, CoreCivic had a trailing price-earnings (P/E) ratio of 18 times (industry median 54), price-book (P/B) ratio of 2.7 times (industry median 1.2) and price-sales (P/S) ratio of 2.2 times (industry median 7.4).
The REIT had a trailing dividend yield of 5.9% with a 109% payout ratio.
CoreCivic
CoreCivic introduced itself as a diversified government solutions company with the scale and experience needed to solve tough government challenges in cost-effective ways. The company recently changed its name to CoreCivic from Corrections Corp. of America to reflect its diversified business offerings.
CoreCivic is structured as a real estate investment trust, or REIT, and is the U.S.’s largest owner of partnership correctional, detention and residential reentry facilities and one of the largest prison operators in the country (1).
CoreCivic offers a broad range of solutions to government partners that serve the public good through high-quality corrections and detention management, innovative and cost-saving government real estate solutions and a growing network of residential re-entry centers to help address America’s recidivism crisis. In addition, CoreCivic also offers a variety of rehabilitation and educational program to its residents.
CoreCivic has been a flexible and dependable partner for the government for more than 30 years.
CoreCivic’s customers primarily consist of federal, state and local correctional and detention authorities.
Federal correctional and detention authorities primarily consist of the Federal Bureau of Prisons, the U.S. Marshals Service and ICE. These authorities contributed 52% or roughly $962 million in total CoreCivic sales in 2016 (2).
CoreCivic also provides transportation services through TransCor America LLC – a subsidiary of wholly owned TRS. In 2016, TransCor delivered $2.6 million in sales compared to $4.1 million the year prior.
Facilities, occupancy rates, and compensated occupancy
As of Dec. 31, 2016, CoreCivic owned or controlled 49 correctional and detention facilities, owned or controlled 25 residential re-entry facilities, and managed an additional 11 correctional and detention facilities owned by CoreCivic’s government partners with a total design capacity of approximately 89,700 beds –Â compared with 88,500 beds in 2015 –Â in 20 states and the District of Columbia.
The total occupancy rate for these facilities, including leased, was 80% in fiscal 2016 compared to 83% in fiscal 2015, according to company filings.
Meanwhile, the average compensated occupancy of CoreCivic’s owned and managed facilities, excluding idled facilities, was 87% for 2016 compared to 89% in 2015.
Business operations and figures
CoreCivic chose to report two business segments: owned and managed facilities and managed-only facilities.
Owned and managed facilities
Owned and managed facilities include the operating results of those facilities placed into service that was owned or controlled via a long-term lease and managed by CoreCivic.
In 2016, sales for CoreCivic’s owned and managed facilities grew by 4% to $1.6 billion, or 89% of total CoreCivic management revenue –Â excluding other revenue, compared to the year prior. The segment also delivered a 33.4% net operating income margin vs. 32.8% in 2015 (3).
Managed-only facilities
Managed-only facilities include the operating results of those facilities owned by a third party and managed by CoreCivic.
In 2016, sales for managed-only facilities declined by 3% to $205.4 million, or 11% of total management revenue. The segment had a net operating income margin of 10.6% compared to 10.4% in 2015.
Sales, profit growth and profit margin averages for the past two years were 6%, 6.4% and 12.1%.
Funds from operations
According to the company, funds from operations (term) is a widely accepted supplemental non-GAAP measure utilized to evaluate the operating performance of real estate companies. In addition, CoreCivic also presents its normalized funds from operations as an additional supplemental measure as the company believes it is more reflective of its core operating performance.
In 2016, funds from operations grew by 0.7% to $314.3 million while normalized figures grew by 0.09% to $317.6 million.
Cash, debt and book value
As of December, CoreCivic had $37.7 million in cash and cash equivalents and $1.44 billion in debt with a debt-equity ratio of 1 –Â similar to the year prior period. Goodwill comprised 1.2% of CoreCivic’s $3.27 billion in assets while having a book value of $1.46 billion –Â similar to December 2015 figures.
Cash flow
In 2016, CoreCivic experienced a 6.1% decline in cash flow from operations to $375.4 million secondary to slightly weak profit growth that was partly alleviated by increase in cash inflow from depreciation and amortization, noncash equity compensation, other expenses and noncash items and marked growth in accounts receivable, prepaid expenses and other assets.
Capital expenditures including capitalized lease payments were $93.5 million leaving CoreCivic with $281.9 million in free cash flow compared to $141 million in 2015.
CoreCivic also received $8.4 million in proceeds from its asset sale and $2.54 million in payments received on direct financing and notes receivable. The firm also allocated a $43.8 million in business acquisitions compared to $158.4 million the year prior.
CoreCivic also allocated 129% of its free cash flow in dividend payouts to shareholders in the recent three fiscal years.
In 2016, CoreCivic had net repayments of $20.9 million including debt proceeds, principal repayments, and lease obligations.
Conclusion
As observed, CoreCivic has operated in line with its previous years of operations. Certainly, occupancy rates were a bit lower, but the firm was able to exhibit growth in its owned and managed facilities.
Meanwhile, CoreCivic has shown business growth weakness, particularly in its managed-only facilities.
With flat book value growth, the company also exhibited a leveraged balance sheet, favoring creditors rather than shareholders in a debt-equity perspective.
GAAP cash flow identified that CoreCivic has been overly generous to its shareholders through providing share buybacks and dividends while its funds from operations, a non-GAAP measure, continued to grow steadily.
In February, Canaccord Genuity labeled CoreCivic shares as a buy and raised its target price to $34 a share from $30. Three analysts that cover the company had an average price target of $36 a share.
In summary, CoreCivic shares are a hold with a $29 a share price target –Â 20% margin from analysts’ average –Â given CoreCivic’s leveraged balance sheet and significant cash flow payouts in terms of GAAP measure.
Notes
- 10-K: CoreCivic began operating as a REIT in 2013.
As a REIT, we generally are required to distribute annually to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains). Our REIT taxable income will not typically include income earned by our TRSs except to the extent our TRSs pay dividends to the REIT.
- 10-K: Our customer contracts typically have terms of three to five years and contain multiple renewal options. Most of our facility contracts also contain clauses that allow the government agency to terminate the contract at any time without cause, and our contracts are generally subject to annual or bi-annual legislative appropriations of funds.
- Me: total
10-K: CoreCivic defines facility net operating income as a facility’s operating income or loss from operations before interest, taxes, asset impairments, depreciation, and amortization.
Disclosure: I do not have shares in any of the companies mentioned.
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