DOI: 10.7910/dvn/elhh1q
title: GEO - data and analysis

description: Summary
Since 2017, GEO shares have fallen sharply from $30 to ~$8.50 per share, at one point below even the book value of $8.19 per share.

President Biden recently signed an executive order that banned the renewal of Department of Justice contracts with private prisons, but the effect on GEO is way way less than the market thinks.

The border crisis renders ICE dependent on GEO for capacity, making it near impossible for ICE to cut ties in the near future.

With a market cap of just $1.02 Billion, GEO has the potential to increase 2-3x in the next 6-12 months.

cropped image of african american prisoner reading book
LightFieldStudios/iStock via Getty Images
Thesis
GEO Group (GEO) is a deeply mispriced provider of privately-owned prisons, falling from a price of $30+ in early 2017 to the current price of $8.50 per share. GEO has fallen primarily as a result of concerns about legislation regarding private prisons, a canceled dividend, the likely shift away from a REIT structure, and high levels of debt.

These overblown concerns have created a pretty solid structural opportunity.

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Company overview
GEO operates in several segments, such as GEO care, International services, and U.S. Secure Services.


Source: Annual report
1 - U.S. Secure Services
U.S. Secure services account for the majority of their revenue, 67%, and includes their correctional facilities and processing centers. Secure services manage 74,000 beds across 58 facilities as of the 2020 annual report.

GEO transport is included in U.S. secure services, but we felt it warranted its own paragraph. GEO transport provides secure transportation services to government agencies. With 400 customized, U.S. Department of Transportation compliant vehicles, GEO transport drove more than 14 million miles in 2020.

2 - GEO Care
GEO care is a series of programs designed to reintegrate inmates and troubled youth into society. They operate through reentry centers, non-residential reentry programs, and youth treatment programs. GEO care operates approximately 4-dozen reentry centers, which provide housing, employment assistance, rehabilitation, substance abuse counseling, and vocational and education programs to current and former inmates. Through their reentry segment, they operate more than 70 non-residential reentry programs that provide behavioral assessments, treatment, supervision, and education. GEO care made up 23% of total 2020 revenue.

Geo monitoring is included in GEO care. Through a wholly-owned subsidiary, BI Inc., GEO offers monitoring technology for parolees, probationers, pretrial defendants, and individuals involved in the immigration process. As of the 2020 annual report, BI helps monitor ~155,000 individuals across all 50 states.

3 - International operations
International operations made up only 10% of revenue in 2020, but it is showing signs of growth. GEO recently landed a 10-year contract with the United kingdom, which they expect to total $760 million in revenue over the course of the contract. They also landed an 8-year contract with the Scottish Prison Service, which grants an annualized revenue of $39 million and has a 4-year renewal period.

Why is GEO Mispriced?
While there are several reasons for the dramatic reduction in share price over the last 4 years, the main reason was the looming fear of legislation destroying privately owned prisons.

To a degree, this fear materialized on January 26th, 2021, when President Biden signed an Executive Order ordering the Attorney General not to renew any Department of Justice contracts with "privately operated criminal detention facilities."

At face value, this order seems as though it would have a devastating impact on GEO. However, only ~25% of total revenue is impacted in any form by this order.

The executive order only concerns branches of the Department of Justice. Only 2 DOJ branches have business connections with GEO, the US Marshals (USMS), and the Bureau of Prisons (BOP).


Source: Annual report
It is imperative to note that

Immigration and Customs Enforcement (ICE), is not a branch of the DOJ and is therefore unaffected by this order.

Individual states, as well as other countries, are unaffected by this order

Bureau of Prisons
GEO currently holds several agreements with the BOP relating to operations of prisons across the country. As of year-end 2020, agreements involving the BOP accounted for 14% of total revenue.

All revenue from the BOP will not disappear, as the executive order does not impact reentry facilities. In 2Q21, after the executive order was made, GEO renewed 5 BOP reentry contracts. GEO even scored a new contract with the BOP, regarding the construction and operation of a new facility in Tampa.

United States Marshal Service
The United States Marshal Service does not own or operate detention facilities but instead rents the use of facilities mostly through intergovernmental service agreements. GEO currently has 12 USMS facilities, 9 of which are operated through an intergovernmental service agreement and 3 of which are through a direct contract.

In their recent conference call, GEO stated that they are actively working with USMS to comply with the executive order. The order seems to focus mostly on direct contracts, which only account for 3 of GEO's 12 USMS facilities. That being said, GEO is waiting on USMS to fully interpret the order, and if found to restrict intergovernmental service agreements as well, GEO could lose all 12 USMS facilities at their contract expiration

ICE
As mentioned above, ICE is not a part of the DOJ, therefore there is no immediate legislative threat. While GEO does note under their risk section that ICE may be impacted by legislation in the future, we do not view this as likely for several reasons.

ICE is far more reliant on private detention centers than the Department of Justice, which is why we suspect Biden left ICE out of the executive order. According to Wikipedia, only 8.1% of the total US prison population is held in private detention centers. The number of immigrant detainees held in private facilities is much greater, "73% by some accounts."

ICE is currently under a crisis of sorts at the border, with border encounters significantly higher than years prior.


Source: US customs and border protection
Above is a graph of the number of southern border encounters by month, with each line representing a different year 2018-2021. So far into 2021, the southern border is facing record numbers of attempted entry into the United States.

This trend is evident in GEO's recent report. From 1Q21 to 2Q21, the population of GEO's immigrant processing centers has increased by approximately 100%, compared to the same period increase of 10% in the population of their USMS facilities.

Currently, a large portion of border facilities and processing centers are wildly above capacity. Here is an excerpt from an NBC news article published on July 31, 2021.

As of Saturday, border patrol processing facilities were holding migrants 585 percent above capacity. In the Rio Grande Valley, the busiest sector for border crossings, there were 6,671 immigrants being held in facilities meant for 965 people, according to one of the officials, leading to the spread of Covid-19, other viruses and lice among migrants.

With some facilities presently at 500% capacity, cutting the total capacity as much as 73% would result in complete disaster.

We firmly believe that until the border crisis subsides, it is unlikely that the government will cut ties with privately-held immigrant detainee centers. Why? Because ICE can't afford a capacity reduction.

What does this mean for GEO?
In their 2Q conference call, despite the executive order being in effect, GEO raised their full-year 2021 guidance. This increase represents a larger than expected boom in immigrant detainees, as well as a lower than expected impact of legislation on the core business. They now expect a full year 2021 revenue of ~$2.3 billion, a figure in line with 2018, when their share price exceeded $20. They also project a net income of ~170 million for the full year, a figure that beats 2018 by ~35 million.

It appears that GEO believes that the increase in illegal immigration will offset the decrease in revenues caused by Biden's executive order, which falls in line with our thesis.

Current Valuation
Due to the perceived risk, GEO trades at some of the lowest valuation multiples on the market. We get GEO stock price in Excel and stock price in Google Sheets using &lt;a href="https://finsheet.io/"&gt;Finsheet&lt;/a&gt; to compute the intrinsic valuation of GEO.


Chart
GEO's price is so low that it is trading at just 20% of the S&Ps PE, 21% of the S&Ps P/FCF, and 34% of the S&Ps PB ratio.
The Value
An important part of a discounted cash flow is the discount rate, below explains how it has been calculated.


Source: author calculations
The calculations below outline how an intrinsic value for GEO Group is arrived at by discounting future cash flows to their present value using the 2 stage method. We use analyst's estimates of cash flows going forward 10 years for the 1st stage, the 2nd stage assumes the company grows at a stable rate into perpetuity.

GEO Group is a Real Estate Investment Trust (REIT), we use funds from operations (FFO) or adjusted funds from operations (AFFO) instead of levered free cash flow for REITs. This excludes depreciation and borrowing. Ideally analysts estimates of AFFO are used, where these aren't available we use FFO.


Source: author calculations

Source: author calculations
As you can see below, we arrive at an intrinsic value per share of $36, over 400% of the current share price. The value is greater than the 2017 high of over $34 per share.


Source: author calculations
Applying a 25% margin of safety, we get a price target of $27. And using a target return of 100%, we arrive at a buy price of anything $13 and below.

Risks
Future Legislation
To summarize our viewpoint, GEO offers other services to the Bureau of Prisons that are still being renewed, the USMS is working with GEO to get around these restrictions, ICE can't afford to cut border detention center capacity in the near future, and GEO has both international and individual state presence that would not be affected by these laws.

It is also worth noting that Obama enacted a similar order, which was then reversed by Trump early in his term. If the next president is a Republican, the current legislation may be reversed.

Debt
According to their latest balance sheet report, GEO has just over $3 billion in total debt, consisting of $2.95 billion in long-term debt and $25 million in current debt.

This is unlikely to cause GEO problems for a number of reasons.

In their 2Q conference call, they stated that

We recognize there have been concerns regarding our future access to financing. We have adopted a proactive approach to address this concern as we continue to focus on debt reduction and deleveraging. In 2020 we reduced our net recourse debt by approximately $100 million. During the first half of 2021, we further reduced net recourse debt by approximately $105 million representing significant progress toward our previously articulated goal of reducing net recourse debt by between $125 million and $150 million in 2021. We intend to remain focused on debt reduction and/or de-leveraging during the second half of the year.

They have a clear plan to reduce their debt and are executing it on par or better than expected, evidenced by their raised debt reduction guidance from $125-$150 million to $150-$175 million for the full year 2021.

GEO also has assets of ~$4.5 billion including ~$500 million in cash. GEO's quick ratio, a measure of liquidity calculated by taking assets minus inventory and dividing it by liabilities, is 2.3. A 2.3 quick ratio means that hypothetically in the event of a total liquidation, GEO could pay off all its debts 2.3 times.

For the reasons listed above, despite having a high quantity of debt relative to the market cap, GEO shareholders have no reason to worry about bankruptcy.

Dividend situation
GEO has canceled their dividend, however, as of the last report, they are still legally a REIT. If the transition to C-corp is not completed by year-end 2021, they may be forced to pay a dividend. And in the case of a 2021 dividend, GEO plans to pay mostly in shares.

A dividend paid in shares does create some dilution. Given a projected net income of $170 million annually for 2021, the 90% they are required to pay would amount to around ~15% of the current market cap. This "dilution" to a shareholder is offset by the value of the additional shares granted to the said shareholder, so a 15% reduction in share value would be offset by 15% more shares.

The transition away from a REIT and the dividend cut may cause short-term volatility in the share price, as income investors dump their shares and REIT ETFs are forced to sell, but the focus on paying down debt instead of paying dividends is arguably fundamentally bullish.

Conclusion
GEO has fallen far below fair value for reasons including their canceled dividend, a potential shift away from a REIT structure, their high debt relative to market cap, and concerns regarding legislation. GEO's business can and will survive, despite all the threats listed above. Eventually, the share price will converge to the stock's fair value.

To explore other alternatives to Finsheet, check out this &lt;a href="http://www.columbia.edu/~tmd2142/get-stock-price-excel-google-sheets.html"&gt;guide&lt;/a&gt; from Columbia University about how to get stock price in Excel and stock price in Google Sheets.