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Corrections Corp Of America (CXW), The Geo Group, Inc. (GEO): Is There Investment Opportunity in the Prison Sector?

While death and taxes are the only guarantees in life, it’s a good bet that crime will always be a fact of life, even if it doesn’t pay.According to the U.S. Department of Justice, the number of sentenced offenders per 100,000 residents was 492 in 2011, versus 500 in 2010.The constant stream of prisoners has led to overcrowding, with the federal government and 24 states recently reporting prison censuses that are above capacity.On the upside, the high demand for correctional facilities and services has created opportunity for businesses.So, how does an investor play the sector?

Corrections Corp Of America

Like other industries, prisons benefit from economies of scale in their supply chain, including purchases of food and medical supplies. The industry’s titans, like Corrections Corp Of America (NYSE:CXW) and The Geo Group, Inc. (NYSE:GEO), have spent the last decade consolidating smaller, less efficient operators.With overall occupancy levels that top 90%, the industry has reliable income characteristics across business cycles, which has led the top public companies to pursue REIT conversions in order to expand their investor base.

Corrections Corp Of America (NYSE:CXW) is the largest private owner of correctional facilities in the U.S., owning or managing nearly 45% of the privately-owned facilities in the country.In its latest fiscal year, the company reported mixed financial results, with a 2% increase in revenues but a 9% decline in operating income.Corrections Corp Of America (NYSE:CXW)’s top line benefited from small increases in both its compensated population and the per-day rates paid by government agencies.However, rising turnover and compensation costs for its correctional officers put a crimp in the company’s operating profit.

Looking ahead, Corrections Corp Of America (NYSE:CXW) is optimistic about the industry’s prospects, despite funding problems at the state level.The company has become more conservative in its capital allocation process, only erecting new facilities where it has long term management agreements in place that allow it to recover its capital costs.Corrections Corp Of America (NYSE:CXW) also sees opportunities to acquire existing state-owned facilities, which provides cash windfalls for debt-laden states.

Meanwhile, The Geo Group, Inc. (NYSE:GEO) is currently positioned as the #2 owner of correctional facilities in the U.S., with 73,000 beds in 100 facilities.Compared to Corrections Corp Of America (NYSE:CXW), The Geo Group, Inc. (NYSE:GEO) has created a more diversified revenue stream, with a large community services segment that manages the prisoner lifecycle, from arraignment to reintegration.The company also entered the remote monitoring area through the acquisition channel, including its purchase of Cornell Corporation in 2010.

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