Ignore the Shorts: GEO Group Has Room to Run

For-profit prison operator-gone-REIT GEO Group (NYSE: GEO  ) satisfied investors and analysts this past week with on-par earnings. For years, the company has benefited from the U.S. imprisonment boom -- building and managing prisons across the country. In just the past few months, the company converted to a REIT to address certain changes in the industry. For investors, this means high dividend payouts and some protection from the prison shrinkage trend happening in the country. Still, some are worried that the company is headed into trouble, with decreased government spending and pressure to close prisons. Here's what you need to know about GEO Group going forward.

Earnings recap
Though revenues shrank year over year, GEO Group still managed to meet analyst expectations with $377 million. In 2012's first quarter, the company brought in $401.3 million.

The story is a little more encouraging on the bottom line. GEO earned $0.38 per share -- right on target with analyst expectations, and a 23% premium to the prior year's number. Adjusted funds from operations, the go-to metric for REIT analysis, hit $0.69 per share from $0.54 per share.

Gross margins improved 140 basis points, while operating and net margins grew 60 and 250 basis points, respectively.

Yet with more than 1 million shares short (about 2.75% of the outstanding amount), there seems to be considerable thought that GEO Group may not be able to maintain growth in coming quarters. Is this a reasonable concept?

Looking ahead
Management is taking the right steps to address the industry trends and securing the balance sheet. The company refinanced at historically low rates, while confirming an annual $2 dividend. Though there may be a trend toward closing prisons, GEO has a considerable real estate portfolio that can't be underestimated. The company owns or leases 70% of its facilities and 60% of its beds, with two-thirds of revenue coming from company-owned sources. In all, the company has 8 million square feet of real estate and 4,000 acres across the country.

Any one prison closure won't crush GEO, as no customer represents more than 5% of the company's revenues. Customer retention is extremely high, along with occupancy rates around 90%.

Full-year adjusted funds from operations guidance is in the range of $200 million to $210 million. The company has an additional 6,000 empty beds that it doesn't factor into results. Any utilization of these beds would boost results significantly.

The call
For income-seeking investors, GEO Group still offers investors a very well-run company with attractive capital appreciation prospects. Though it isn't bargain priced, short interest may put pressure on the stock in coming weeks and give investors an attractive entry point.

Investors can also look at Corrections Corporation of America (NYSE: CXW  ) . This company also recently converted to a REIT structure and is well managed.

Though our nation's love affair with imprisonment is rather shameful, GEO Group is a first-class operator in the space and deserves investor interest.

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