What are we looking for?
The United States has the highest incarceration rate in the world with over seven million people under some form of supervision – well over 3 per cent of the country’s population. Where there’s that big a market, profit opportunities are bound to appear and several companies cater to the demand for law and order. Today we look at where these shares trade, what they are worth, and analysts’ target prices 12 months out.
Today’s group includes three U.S. private companies that run prisons for budget-constrained states that argue they cannot afford to build new facilities. Corrections Corp. of America has 65 prisons in the U.S. and Puerto Rico, and handles about 61,000 prisoners. GEO Group provides prison services in the U.S., Australia, South Africa and Britain. Avalon Correctional Services, which trades over the counter, manages facilities in Oklahoma, Texas and Wyoming.
No analysis of the law and order industry would be complete without looking at other companies on either side of the crime and defence discussion. For instance, Smith & Wesson and Sturm Ruger & Co. make firearms, Command Security Corp. provides guards for numerous government and private organizations, while Taser International makes the stun guns that are standard issue among many law enforcement agencies.
What did we find?
At first glance, running a private prison looks like an ideal business: Prisons earn steady recurring income, are not affected by business cycles, and their customers can’t defect to the competition. But, generally speaking, none of these companies jump out as something you have to own. Neither do the firearms makers or security firms.
As the table shows, most of these firms trade at rather high price-to-cash flows (a lower number is better, and anything over seven or eight is quite high). These firms also tend to have large amounts of debt in comparison to their equity and hefty price-to-sales ratios.
Yet, over the past year, the share prices of these companies have increased an average of 25 per cent, and analysts expect them to tack on another 21 per cent over the next 12 months. So far crime appears to be paying off for these firms, even if current share prices may initially seem like highway robbery.
Prison, firearms and security-related stocks
|Company||Ticker||Recent price $||Price/cash flow|
|Smith & Wesson||SWHC-Q||8.04||13.86|
|Sturm Ruger & Co.||RGR-N||43.30||13.35|
|Geo Group Inc.||GEO-N||26.31||6.96|
|Garda World -Cl A||GW-T||9.30||3.27|
|Company||Ticker||Recent price $||Price/cash flow||Debt/equity||Price/sales||1 year total return %||12-month target price $|
|Smith & Wesson||SWHC-Q||8.04||13.86||0.44||1.25||145.87||10.75|
|Sturm Ruger & Co.||RGR-N||43.30||13.35||0.00||2.06||33.35||53.33|
|Geo Group Inc.||GEO-N||26.31||6.96||1.27||0.99||23.50||31.08|
|Garda World -Cl A||GW-T||9.30||3.27||0.60||0.23||0.76||11.50|