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January 11, 2007

Corrections Corporation of America (CXW): Hot Stock or High-Debt Timebomb?

Last fall, I continued by studies of private prisons by reading through some of the Securities and Exchange Commission filings for the Corrections Corporation of America (ticker: CXW). I was interested in looking at the overhead costs to get a better sense of why private prisons don't save much money over state run prisons. (For those wanting the quick answe, check out the Why Private prisons Don't Save Money page I made.)

What's interesting is looking at the chart of their stock price, especially in light of discussion on various websites about how they're a hot stock and gaining rapidly. I tend to be skeptical because I teach about private prisons and show my class newspaper stories from the 1980s and 1990s saying the same thing. Indeed, the stocks had a good run befre mismanagement, shareholder lawsuits, escapes and riots caused them to go into near bankruptcy.


But here's the chart of their stock price that's included in some of the SEC filings:

cca (cxw) short-term misleading stock graph

Wow - looks great. Where do I buy!

But wait, here's the longer term view:

cca long-term stock cart (cxw)

This bottom chart is a longer time frame. You can see all the hype and frenzy leading up to a monumental, wealth-destroying crash. But if life gives you lemons, make lemonade - take the absolute low point of your stock price (well under $0.50 a share) and make it the starting point to show how much you have recovered.

The compelling story about growing incarceration rates has been constant through this time period. Almost everything I read now about why this stock is a winner I read in the run-up to that 1998 high. I now read the management team is much better, but I also read that CCA founder Doc Crants got innovator of the year awards leading up to the peak.

Why Private Prisons Don't Save Money

I know it is surprising o read they don't, but a study by the National Institute of Justice found a savings of 1% - and many other studies have not been able to find a difference. For their annual report and webpage CCA cherrypicks the studies it uses to show a large savings. But you should be skeptical of that as well as claims they offer better rehabilitation programs that lower recidivism.

With costs savings, consider:

  • CEO John Ferguson made more than $1.4 million in salary and bonus. That was for 2005, bith an increase to base salary for 2006. Compare that with a state Dept of Corrections chief. Pay for all the top executives is much higher than their state couterparts.
  • Retainer for being on the Board: $50,000 + $3,000 a meeting.
  • Recapitalization and refinancing: $32 million ("As of December 31, 2005, we had total indebtedness of $975.6 million")
  • General and Administrative Expenses: $57 million
  • Exposure to lawsuits: "As of December 31, 2005 and 2004, we had $13.2 million and $16.6 million, respectively, in accrued liabilities related to certain legal proceedings in which we are involved."
  • Customer Acquisition Costs: $873,000 + customer list $765,000
  • Sale of additional stock: $510,000 

The rest of list of a private prison's overhead costs, with citations to the SEC documents, is part of the Crime Pays resources at my website.  

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