AI-Assisted Research Desk 09/11/2023

About The GEO Group

The GEO Group, Inc. (NYSE: GEO) is a leading diversified government service provider, specializing in design, financing, development, and support services for secure facilities, processing centers, and community reentry centers in the United States, Australia, South Africa, and the United Kingdom. GEO’s diversified services include enhanced in-custody rehabilitation and post-release support through the award-winning GEO Continuum of Care®, secure transportation, electronic monitoring, community-based programs, and correctional health and mental health care. GEO’s worldwide operations include the ownership and/or delivery of support services for 102 facilities totaling approximately 82,000 beds, including idle facilities and projects under development, with a workforce of up to approximately 18,000 employees.

Summary:

The GEO Group, Inc. (NYSE: GEO) released its financial results for Q2 and the first half of 2023, showcasing mixed performances. Revenues and Adjusted EBITDA for the first half of the year rose, but Net Income saw a drop compared to the prior year. With revenue from ICE contracts rising.

Financial Highlights:
Q2 2023 Results:

Total revenues: $593.9 million, a slight increase from $588.2 million in Q2 2022.
Net Income: $29.5 million, down from $53.7 million in Q2 2022.
Adjusted EBITDA: $129.0 million, down from $132.3 million in Q2 2022.
The increased net interest expense due to the closure of outstanding debt transactions and higher interest rates impacted the results.

First Half of 2023 Results:

Total revenues: $1.20 billion, up from $1.14 billion in the first half of 2022.
Net Income: $57.5 million, down from $91.9 million in the first half of 2022.
Adjusted EBITDA: $259.9 million, slightly up from $257.5 million in the first half of 2022.

2023 Financial Guidance:

Adjustments have been made to the U.S. Department of Homeland Security’s ISAP participant level expectations.
Full-year 2023 revenue projection stands at approximately $2.4 billion.
Net Income is expected to range between $95 million to $110 million.
Adjusted EBITDA is projected to lie between $490 million to $520 million.
Effective tax rate is approximated at 29% for 2023.
Q3 and Q4 projections suggest stable performance, not accounting for potential reactivation of idle Secure Services facilities.

Business Dynamics:

GEO remains a major player in the secure facilities and processing centers sector.
The company is facing some headwinds in its Electronic Monitoring and Supervision Services segment.
A significant revenue driver for GEO has been the contracts with ICE, showing an almost 40% increase in 2022 to a record $1.05 billion.
GEO’s remote monitoring of immigrants has contributed significantly to this growth.
The Biden administration’s policies on asylum and detention have impacted the dynamics of private prison operations, leading to changes in the detainee numbers.

Synopsis of GEO’s Performance & Prospects:

Overview:

GEO’s recent performance marginally surpassed the anticipated metrics, albeit the set expectations weren’t particularly lofty. Despite a satisfactory quarterly report, there were no standout elements that would particularly entice the investment community.

Projected Trajectory:

For the forthcoming third quarter, GEO has projected revenue in the range of $588-603 million, modestly below the analyst expectation of $612.6 million. Anticipated adjusted EBITDA falls between $115-130 million, while the net income is estimated to lie between $19-26 million.

For the final quarter, revenue expectations stand between $595-$601 million, with a steady adjusted EBITDA prediction of $115-130 million and a projected net income of $19-27 million.

On an annual scale, GEO refines its revenue estimate to approximately $2.4 billion, slightly trimmed from its prior forecast range of $2.38-$2.46 billion. This stands against a collective analyst prediction of $2.43 billion. The company anticipates an adjusted EBITDA of $490-530 million, a tad lower than its earlier $507-537 million prediction. The expected net income is also reduced to a range of $95-110 million from a previous range of $105-$125 million.

GEO’s Perspective:

George Zoley, the Founder and Chairman of GEO, illuminated on the Q2 earnings call the decline in participants for the federal government’s Intensive Supervision and Appearance Program (ISAP). Although the reduction has persisted longer than projected, Zoley remains optimistic about its stabilization, possibly followed by a moderate upswing. Their ICE processing centers have witnessed a 20% surge in occupancy since May. Zoley also indicated potential funding continuations for ICE in the federal fiscal year of 2024.

In elucidating their optimism about ISAP’s stabilization, the firm hinted at being privy to potential policy shifts which could propel wider adoption of alternative detention measures and related equipment, without explicitly discussing DHS policy.

In another strategic move, the company inaugurated primary health services across 13 public prisons in Australia this July, a venture anticipated to generate $33 million annually.

GEO’s downward revision in ISAP projections is a tad disheartening, with extended decline into Q3. Nevertheless, the firm remains hopeful about materializing discussed policy shifts that might rejuvenate this high-margin sector. Additionally, the Australian healthcare contract and reactivation of Great Plains offer promising prospects.

GEO’s facilities continue to operate below their capacity, affecting profitability. Enhanced occupancy beyond guaranteed minimums is crucial for substantial profit gains.

Financial Valuation:

GEO’s present valuation pegs it at 5.5x its EV/EBITDA multiple, considering a 2023 EBITDA consensus of $509.7 million (previously at $524.6 million). The 2024 EBITDA consensus of $541.4 million values it at approximately 5.2x.

With a forward EPS trading at 8.3x, the projected 2023 EPS stands at 88 cents. Revenue growth is expected to be 1.2% in 2023, accelerating to 4.9% in 2024.

Although GEO’s EBITDA multiple remains relatively stable, there has been a notable decline in both the EBITDA estimates and stock value.

Final Thoughts:

GEO has underperformed this year, with both the Title 42 influence not manifesting to its full potential and protracted ISAP challenges. Nonetheless, the stock appears undervalued, positioning the company potentially for growth and debt reduction.

Several avenues remain for the firm, including reactivating dormant facilities, asset sales for debt alleviation, an increase in ISAP participants, and surpassing ICE occupancy minimums. Currently, GEO possesses nearly $275 million in dormant facilities awaiting potential sale or reactivation.

Despite the setbacks, GEO’s current valuation coupled with potential growth avenues holds promise. An 8.2x multiple on 2024 EBIDTA projections could potentially drive the stock up towards $20, marking a substantial appreciation from its present standing.

Controversies:

GEO Group, a private prison and mental health facility operator, has been subject to criticism due to its business model of profiting from detentions.

While the Biden administration has increased reliance on private facilities, concerns remain on the conditions inside these centers.
Instances like the repurposing of a GEO-operated prison in Pennsylvania into a detention center highlight these concerns. Changes made are more cosmetic than systemic.

Reports of mistreatment and lack of proper conditions, as noted in the case of Sunny Boy Sonkarlay, raise questions about the company’s operations and practices.

Commentary:

GEO’s performance in 2023, from a financial standpoint, presents a mixed bag. While revenues have increased, a substantial rise in net interest expense has impacted net income negatively. The controversial nature of GEO’s operations, particularly in light of recent revelations, may affect the company’s public perception and investor confidence.

The increasing reliance on private entities like GEO for immigration detention under the Biden administration signals potential opportunities for growth. However, the accompanying controversies and public scrutiny might present challenges.

Considering both financial performance and external factors, investors must weigh the potential returns against the associated risks and ethical implications of investing in the private prison sector.

Short Interest as of 09/11/2023:

Short Interest 18,097,788 shares – source: NYSE
Short Interest Ratio 12.04 Days to Cover
Short Interest % Float 15.40% – source: NYSE (short interest), Capital IQ (float)
Off-Exchange Short Volume 448,718 shares – source: FINRA (inc. Dark Pool volume)
Off-Exchange Short Volume Ratio 66.24 % – source: FINRA (inc. Dark Pool volume)

Source: Fintel

Multiple Bottom Chart with Increasing Volume

 

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Your friend,

Steve Macalbry

Senior editor BestGrowthStock.Com

 

Disclaimer: The author is not a licensed financial advisor and the content provided is for informational purposes only. Furthermore, the author of this article does not own any form of equity in GEO as of 09/12/2023. Always consult with a certified financial advisor before making any investment decisions. Bestgrowthstocks.com and it’s parent company Media Source LLC have not been compensated for the creation or distribution of this article in any way.