Fewer prisoners, fewer profits
With the U.S. prison population down 6%, publicly traded correction companies have fallen on hard times
In an era of runaway government spending and uncertainty on Wall Street, publicly traded corrections companies may have seemed like a good idea to some investors. With a literally captive customer base, revenue seemed reliable.
Well chalk up private sector prisons as just one more industry that’s fallen on hard times. According to The New York Times, for the first time since 1972 we have seen a reduction in the U.S. prison population instead of an increase. That means less overcrowding of state and federal facilities – and less need for private sector help to take care of the overflow inmates.
With state budgets getting leaner on lower tax revenue, the expense of “outsourcing” prisoners is hard to justify. When you look at how staggering the cost is, it’s easy to see why elected officials are ending these contracts.
For instance, a 2009 contract between the commonwealth of Pennyslvania and involves outsourcing 2,000 prisoners to Michigan and Virginia. The split is even, with a thousand inmates to each site, at the tune of $62 per prisoner per day. For those of you who aren’t mathematically inclined, that’s a guaranteed payday of $2.26 million per year for the 1,000 bed facilities housing these prisoners.
The reason for the move? Pennsylvania's 27 state prisons, built to hold 43,200 inmates, were housing 52,000, forcing some to bunk in modular units.
You can understand why some investors found these stocks attractive. However, keep in mind that the Pennsylvania deal was never intended to be a long term plan. The state is constructing four new prisons to fill its needs, and you can bet those outsourced prisoners will be heading home once the sites are complete.
What with the rollback in overall prison population, we’ve seen some states cancel deals like this ahead of schedule. For instance, Arizona announced this week it was terminating a contract with Corrections Corp. of America (CXW) to house inmates at a 2,160-bed site in Oklahoma. As a result of this notification, CCA intends to idle the Diamondback facility around June once all the prisoners are gone.
The news has taken a toll on CXW shares. The stock is down 4% so far this week, and Corrections Corp. shares have lost 17% YTD even while the market has been moving up.
Publicly traded prison stocks may have seemed like a good idea when the market turned south in 2008, but this unexpected reduction in the prison population has pulled the rug out from under these companies. It’s time to give these companies their release if you have them in your portfolio. These three prison stocks in particular are duds to sell now.
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