Cornell Co. (CRN, Financial) August 25, 2009 close: $20.61 /share
52-week range: $13.42 (Mar. 9, 2009) - $28.45 (Sep. 18, 2008)
Cornell Companies, Inc. provides privatized correctional, detention, and pre-release services for adults and juveniles. The Company provides facility development, design, construction, and operational services to governmental agencies within secure institutional correctional facilities, juvenile treatment and educational services, and pre-release correctional services divisions.
Cornell now has 70 facilities serving 4 Federal agencies, 15 states, the District of Columbia and
many local government entities.
Cornell’s 35 years of experience with a wide range of services allows customers access to programs and services focused on treatment and release preparation. Among the services offered are:
• substance abuse/addiction counseling, education and treatment
• individual, family and group counseling
• vocational training
• gender-specific treatment
• behavior management strategies
• individual case management
• therapeutic communities
Constricted budgets at all levels of government, has led to a greater outsourcing of detention services for both youths and adults. Cornell Companies have been benefiting from this trend. Earnings per share surged by 84% (from $0.82 in 2007 to $1.51) in 2008.
First half 2009 profits continued the trend at $0.84 versus $0.68 (+23.5%). Unfortunately this is a growth business.
Here are their per share numbers as reported by Value Line:
Year .........Sales ........ C/F ......... EPS .......... B/V ...... Avg. P/E
2003 ........20.83 .......1.12 .........0.30 ........12.75 .......41.5x
2004 ........21.89 .......1.40 .........0.38 ........12.13 .......33.9x
2005 ........22.54 .......1.40 .........0.29 ........12.00 .......47.5x
2006 ........25.66 .......2.05 .........0.89 ........12.91 .......18.0x
2007 ........24.78 .......1.92 .........0.82 ........13.77 .......27.6x
2008 ........26.25 .......2.72 .........1.51 ........15.46 .......14.8x
Zacks now sees 2009 sales and earnings hitting new all-time highs. They look for EPS of $1.73 this year and $1.89 next. That makes the current multiple just 11.9 times 2009’s and 10.9x their 2010 estimate.
Ironically, as fundamentals have gotten better and better, the valuation has become quite cheap. This was a ‘glamour’ stock with a ridiculous multiple from 2003 through 2007 and now looks to be a proven growth company at a non-growth price.
A rebound to even 14x this year’s $1.73 expectation would bring these shares back to $24.22/ share. That target price jibes with Standard and Poors’ view. They see ‘fair value’ as $24.70 /share.
A move to the mid-$24’s would make for an 18% – 19% gain by early next year. That’s not bad, but here’s what I see as a better trade that I made earlier today. These are the actual prices I obtained.
..............................................................Cash Outlay ...... Cash Inflow
Bought 1000 CRN @ $20.48 ...................... $20,480
Sold 10 Mar. $22.50 calls @ $2.05 /share .............................. $2,050
Sold 10 Mar. $22.50 puts @ $3.70 /share ............................. $3,700
Net Cash Out-of-Pocket ............................ $14,298
If Cornell shares rise to at least $22.50 (+ 9.9%) from my purchase price by the March 19, 2010 expiration date:
• The $22.50 calls will be exercised.
• I will sell my shares for $22,500.
• The $22.50 puts will expire worthless.
• I will have no further option obligations.
• I will own no shares and hold $22,500 in cash.
That’s a best-case scenario net profit of $8,202/$14,298 = 57%
achieived in just seven months on shares that only needed to go up by 9.9%.
What’s the risk?
If Cornell shares finish below $22.50 on March 19, 2010:
• The $22.50 calls will expire worthless.
• The $22.50 puts will be exercised.
• I will be forced to buy another 1000 CRN shares.
• I will need to lay out an additional $22,500 in cash.
• I will have no further option obligations.
• I will end up with 2000 CRN shares.
What’s the break-even point on the whole trade?
On the original 1000 shares it’s their $20.48 purchase price less
the $2.05 /share call premium = $18.43 /share.
On the ‘put’ shares it’s the $22.50 strike price less
The $3.70 /share put premium = $18.80 /share.
My overall break-even will be $18.62 /share.
CRN could drop by up to 9.1% without causing me a loss on this trade.
Summary:
Cornell Companies looks to be 15 – 20% undervalued at today’s quote.
If it recovers by 9.9% or better (to at least $22.50) by March 19th I can make a 57% cash-on-cash return (by selling the puts against marginable equity already in my account).
I have a 9.1% margin of safety on this trade from my inception price of $20.48 /share.
Disclosure: Author went long CRN shares and short CRN options today.
52-week range: $13.42 (Mar. 9, 2009) - $28.45 (Sep. 18, 2008)
Cornell Companies, Inc. provides privatized correctional, detention, and pre-release services for adults and juveniles. The Company provides facility development, design, construction, and operational services to governmental agencies within secure institutional correctional facilities, juvenile treatment and educational services, and pre-release correctional services divisions.
Cornell now has 70 facilities serving 4 Federal agencies, 15 states, the District of Columbia and
many local government entities.
Cornell’s 35 years of experience with a wide range of services allows customers access to programs and services focused on treatment and release preparation. Among the services offered are:
• substance abuse/addiction counseling, education and treatment
• individual, family and group counseling
• vocational training
• gender-specific treatment
• behavior management strategies
• individual case management
• therapeutic communities
Constricted budgets at all levels of government, has led to a greater outsourcing of detention services for both youths and adults. Cornell Companies have been benefiting from this trend. Earnings per share surged by 84% (from $0.82 in 2007 to $1.51) in 2008.
First half 2009 profits continued the trend at $0.84 versus $0.68 (+23.5%). Unfortunately this is a growth business.
Here are their per share numbers as reported by Value Line:
Year .........Sales ........ C/F ......... EPS .......... B/V ...... Avg. P/E
2003 ........20.83 .......1.12 .........0.30 ........12.75 .......41.5x
2004 ........21.89 .......1.40 .........0.38 ........12.13 .......33.9x
2005 ........22.54 .......1.40 .........0.29 ........12.00 .......47.5x
2006 ........25.66 .......2.05 .........0.89 ........12.91 .......18.0x
2007 ........24.78 .......1.92 .........0.82 ........13.77 .......27.6x
2008 ........26.25 .......2.72 .........1.51 ........15.46 .......14.8x
Zacks now sees 2009 sales and earnings hitting new all-time highs. They look for EPS of $1.73 this year and $1.89 next. That makes the current multiple just 11.9 times 2009’s and 10.9x their 2010 estimate.
Ironically, as fundamentals have gotten better and better, the valuation has become quite cheap. This was a ‘glamour’ stock with a ridiculous multiple from 2003 through 2007 and now looks to be a proven growth company at a non-growth price.
A rebound to even 14x this year’s $1.73 expectation would bring these shares back to $24.22/ share. That target price jibes with Standard and Poors’ view. They see ‘fair value’ as $24.70 /share.
A move to the mid-$24’s would make for an 18% – 19% gain by early next year. That’s not bad, but here’s what I see as a better trade that I made earlier today. These are the actual prices I obtained.
..............................................................Cash Outlay ...... Cash Inflow
Bought 1000 CRN @ $20.48 ...................... $20,480
Sold 10 Mar. $22.50 calls @ $2.05 /share .............................. $2,050
Sold 10 Mar. $22.50 puts @ $3.70 /share ............................. $3,700
Net Cash Out-of-Pocket ............................ $14,298
If Cornell shares rise to at least $22.50 (+ 9.9%) from my purchase price by the March 19, 2010 expiration date:
• The $22.50 calls will be exercised.
• I will sell my shares for $22,500.
• The $22.50 puts will expire worthless.
• I will have no further option obligations.
• I will own no shares and hold $22,500 in cash.
That’s a best-case scenario net profit of $8,202/$14,298 = 57%
achieived in just seven months on shares that only needed to go up by 9.9%.
What’s the risk?
If Cornell shares finish below $22.50 on March 19, 2010:
• The $22.50 calls will expire worthless.
• The $22.50 puts will be exercised.
• I will be forced to buy another 1000 CRN shares.
• I will need to lay out an additional $22,500 in cash.
• I will have no further option obligations.
• I will end up with 2000 CRN shares.
What’s the break-even point on the whole trade?
On the original 1000 shares it’s their $20.48 purchase price less
the $2.05 /share call premium = $18.43 /share.
On the ‘put’ shares it’s the $22.50 strike price less
The $3.70 /share put premium = $18.80 /share.
My overall break-even will be $18.62 /share.
CRN could drop by up to 9.1% without causing me a loss on this trade.
Summary:
Cornell Companies looks to be 15 – 20% undervalued at today’s quote.
If it recovers by 9.9% or better (to at least $22.50) by March 19th I can make a 57% cash-on-cash return (by selling the puts against marginable equity already in my account).
I have a 9.1% margin of safety on this trade from my inception price of $20.48 /share.
Disclosure: Author went long CRN shares and short CRN options today.
