Image Source: Dave Nakayama
By Valuentum Analysts
On Thursday, August 18, the Department of Justice announced it would no longer be using private prison facilities. As a result, Mr. Market punished shares of prison companies including Corrections Corp (CXW) as many were led to believe that such a decision would have a material impact on the firm’s business due to more than half of its total revenue in 2015 came from the federal government. Our fair value estimate was significantly reduced based on these assumptions and the impact they had on our forecasts of the company’s future free cash flows.
However, it later became evident that the decision from the Department of Justice only impacted correctional facilities of the Bureau of Prisons (BOP, not ‘Total Federal’), which make up a materially smaller portion of Corrections Corp’s business. Said differently, we had overestimated the impact of the news. In 2015, for example, 11% of the firm’s total revenue came from the Bureau of Prisons, as can be seen in the graphic below from its annual report (and this is down from 13% in previous years). The more refined information coming to our attention resulted in some fairly aggressive fair value changes in the past few days for Corrections Corp, but the updated report houses our latest — a less severe fair value cut, but a cut nonetheless.
