Katy, bar the door, they're emptying out the prisons! According to the Pew Center on the States, the country's state prison population dropped by 5,739 in 2009. OK, New York's Rikers Island has no lack of inmates and isn't about to get transformed into a museum like Alcatraz, but it is the first time in 38 years that state prison populations have decreased.
Running wild in the streets
You can thank the recession for more felons being on the streets. State coffers are going begging these days, and it's cheaper for states to monitor an ex-con on parole than keep him behind bars. The Pew Center estimates it costs $79 a day on average to house a prisoner compared to less than $3.50 for probation. That's cheaper than a venti mocha latte (no whip!) at your local Starbucks.
Since the Pew report says recidivism remains the top reason prison populations have soared since 1972 -- between 1990 and 2000, parole violations as a percentage of all prison admissions more than doubled -- states might want to step up their use of private prison operators like Corrections Corp of America (NYSE: CXW ) and Geo Group (NYSE: GEO ) instead of putting perps back on the street.
In the big house
Corrections Corp is the largest private prison operator with 65 jails and detention facilities in 19 states. Its facilities have a capacity for 87,000 inmates and typically operate at more than 90% of capacity. In fact, only the federal government and three states run bigger prison systems, but it costs CCA just $40.49 a day to house and care for an inmate.
The risk to CCA, Geo Group, and the smaller Cornell Companies (NYSE: CRN ) is that as states release more prisoners onto the streets, it will consolidate those that remain into existing facilities. California, with the country's most overcrowded prison system, dumped more prisoners onto the streets than any other state last year and is under a judicial mandate to empty its prisons of 43,000 inmates by the end of next year.
A too-early release program
Geo Group lost a contract with California last year because there weren't enough inmates willing to transfer to a facility it runs for the state of Indiana. It lost another contract with the Bureau of Prisons (BOP) to house illegal aliens convicted of crimes because of funding problems. Corrections Corp will also lose a BOP contract at its expiration later this year.
With Corrections Corp generating 52% of its revenues from state contracts, and California alone accounting for 11% of that amount, an investment here is not without risk.
Making a break for it
While the stocks of both Geo Group and CCA fell on the contract loss news, I believe it only serves investors with an attractive entry point. Yes, there is potential risk of other contract losses, but there's still going to be a large demand for facilities as overcrowding issues can't be met solely by dumping prisoners onto the streets. Total prison populations do continue to grow.
The prison operators themselves are also expanding. Geo has a 1,100 bed expansion under way in Colorado and is managing a new 2,000 bed facility in Florida. Those two centers, along with the lost BOP contract, were not included in the company's 2010 earnings guidance, which expects pro forma per share earnings roughly in line with 2009's.
CCA has over 12,000 unoccupied beds either at existing facilities or at ones under construction, but between new contracts and an expanded contract with California, that number is reduced to 7,300 beds. Demand remains strong.
One in the chamber
I like the idea of private contractors saving taxpayers money while meeting a definite social need. For those who have a visceral reaction to private companies confining prisoners, there are a variety of ways to profit from crime.
Taser (Nasdaq: TASR ) has a growing market for its stun guns (which now come in designer styles!), L-1 Identity Solutions (NYSE: ID ) offers biometric identification and matching technology, and both Smith & Wesson (Nasdaq: SWHC ) and Sturm, Ruger (NYSE: RGR ) arm this nation's police and military. If investing in criminal housing isn't your thing, you can still find alternative routes to make money.
Private detention facilities aren't going away and unfortunately crime, like poverty, will always be with us. Motley Fool Stock Advisor believes Corrections Corp of America will be the winning warden, while I previously said Geo Group looks like a good way to lock up future profits. Either one would probably ensure that crime does pay -- legally.
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