Recently I received the buy recommendation ranking from Zacks for Correction Corporation of America (CXW, Financial). The reason why it received the buy rating is because it surprised on the Zacks Consensus Estimate for the 12th quarter in a row. Zacks called it a No. 1 rank (Strong Buy), considering it a value stock. Corrections Corporation of America operates in very special field. It owns and operates privatized correctional and detention facilities, and the company itself is the prison operator of the U.S. At the end of fiscal year 2010, it has the operation for 66 correctional and detention facilities, including 45 facilities of its own. The total capacity is up to around 90,000 beds in 19 states and the District of Columbia. In addition, CXW is building an additional 1,124-bed correctional facility in Georgia.
On November 3, the executives of CXW discussed the company’s operating performance for third quarter 2011. Damon Hininger, president and the CEO, felt pleased on the third quarter result both operationally and financially. The core business of providing adult secure correctional and detention management services to federal, state and local partners remains strong, and he said he believes that the current environment is very favorable for the business going forward. The company is increasing the occupancy within the system with the increase mainly from Georgia and U.S. Marshal Service during the year.
For financials, CXW has EPS for the third quarter of $0.37 which has exceeded the forecast mainly because of operating cost controlling and a share repurchase program. What should be noted here is that the company kept purchasing shares. CXW has purchased a total of 28.3 million shares at an average cost of around $17.87 a share, nearly 23% of total share outstanding in November 2008. Under the current share purchase program, the company still has $119 million remaining.
In terms of the price performance, CXW offered nice rewards for investors from 2002 – 2007, from $5 in October 2002 to $33 in July 2007, producing the very high compounded annual gain of 45.9%. Then it backed down to the low level in 2009 of $10; it has been fluctuating around the $18-$25 range since August 2009.
In terms of financial health, CXW take on quite a large amount of long-term debt outstanding in the latest quarter. The debt/asset ratio is around 50%; both total liabilities and total equity are standing at around $1.45 billion, whereas the long-term debt is at the level of $1.1 billion (more than 41% of the total asset). With that high level of debt, CXW must have consistent operating cash flow, otherwise it would not be sustainable.
As can be seen, for the last 10 years CXW has consistently produced good operating cash flow and fluctuating but positive for the majority of the years free cash flow. The TTM of CFO stayed around $335 million, along with the debt level of $1.1 billion; the cash flow ratio of CXW is 30% — not a very healthy figure.
For historical valuation and relative valuation, it was considered cheap. Current TTM P/E is 14.3, P/CF is 6.3 whereas the five-year average valuation gives a P/E at nearly 21 and P/CF at 9.3. According to Morningstar's figure, the industry P/E is 24.1 and P/CF is 11.2. So it was cheap relatively speaking. However, with the cash flow ratio at only 30% compared to the high level of debt the company is having, I would demand more margin of safety in relative valuation as well as an absolute low (single digit) of TTM P/E to begin take any interest in CXW stock, even though Zacks ranks it a No. 1 strongly recommended buy.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
On November 3, the executives of CXW discussed the company’s operating performance for third quarter 2011. Damon Hininger, president and the CEO, felt pleased on the third quarter result both operationally and financially. The core business of providing adult secure correctional and detention management services to federal, state and local partners remains strong, and he said he believes that the current environment is very favorable for the business going forward. The company is increasing the occupancy within the system with the increase mainly from Georgia and U.S. Marshal Service during the year.
For financials, CXW has EPS for the third quarter of $0.37 which has exceeded the forecast mainly because of operating cost controlling and a share repurchase program. What should be noted here is that the company kept purchasing shares. CXW has purchased a total of 28.3 million shares at an average cost of around $17.87 a share, nearly 23% of total share outstanding in November 2008. Under the current share purchase program, the company still has $119 million remaining.
In terms of the price performance, CXW offered nice rewards for investors from 2002 – 2007, from $5 in October 2002 to $33 in July 2007, producing the very high compounded annual gain of 45.9%. Then it backed down to the low level in 2009 of $10; it has been fluctuating around the $18-$25 range since August 2009.
In terms of financial health, CXW take on quite a large amount of long-term debt outstanding in the latest quarter. The debt/asset ratio is around 50%; both total liabilities and total equity are standing at around $1.45 billion, whereas the long-term debt is at the level of $1.1 billion (more than 41% of the total asset). With that high level of debt, CXW must have consistent operating cash flow, otherwise it would not be sustainable.
| USD million | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
| CFO | 92.76 | 101.38 | 202.84 | 125.98 | 153.36 | 171.95 | 250.88 | 273.58 | 314.69 | 255.51 |
| FCF | 92.76 | 101.38 | 167.32 | 125.98 | 116.95 | 8.83 | -92.26 | 273.58 | 266.05 | 213.67 |
As can be seen, for the last 10 years CXW has consistently produced good operating cash flow and fluctuating but positive for the majority of the years free cash flow. The TTM of CFO stayed around $335 million, along with the debt level of $1.1 billion; the cash flow ratio of CXW is 30% — not a very healthy figure.
For historical valuation and relative valuation, it was considered cheap. Current TTM P/E is 14.3, P/CF is 6.3 whereas the five-year average valuation gives a P/E at nearly 21 and P/CF at 9.3. According to Morningstar's figure, the industry P/E is 24.1 and P/CF is 11.2. So it was cheap relatively speaking. However, with the cash flow ratio at only 30% compared to the high level of debt the company is having, I would demand more margin of safety in relative valuation as well as an absolute low (single digit) of TTM P/E to begin take any interest in CXW stock, even though Zacks ranks it a No. 1 strongly recommended buy.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
