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Crime Does Pay for CCA

04/25/2003 12:00 am EST


Neil George

Editor, Profitable Investing

"Over 2 million Americans are behind bars, and that number is growing," notes Neil George, editor of, as well as contributing editor to Personal Finance, Wall Street Winners, and the daily By George! daily e-mail. Here's a recent stock "pick of the week". In fact, the prison population is roughly four times what the nation had in the 1970s." Here's Neil's suggestion to play this trend.

"Whether for serious or frivolous crimes, more and more men and women are being convicted in the court system, and prisons can't keep up with the inflow of new inmates. This has led some states, including California, to adopt more generous parole policies, and it's forcing them to decriminalize certain drug-related crimes. However, as the economy remains sour, look for calls to crack down more on everything from burgeoning street-level to capital crimes. In fact, the prison population is roughly four times what the nation had in the 1970, resulting in, you guessed it, more inmates. Needless to say, this is stressing the existing prison system. From federal to states and even local authorities, cash is tight. And with tax revenues remaining less than generous, building more prisons remains a challenge to capital budgets. And even in running them, there are lots of inefficiencies that can be solved by privatization efforts.

“This has all meant new work for Corrections Corp. of America (CXW NASDAQ), which owns and operates its own series of prisons and provides management services for publicly-owned prisons. The company has continued to build revenues while also expanding margins, given greater economies of scale offered by more and more inmates. CCA has common and preferred shares, both of which have begun to be noticed recently by investors who are figuring out that crime does indeed pay, at least for jail keepers. The company is also now in a position to restructure more of its capital, which will include the repurchase of most of its convertible preferreds at a premium to the current market.

“CCA will also be issuing more common shares and along with new debenture issue, it'll be able to pay for the tendering of the convertible issue and pay off higher-rate debt. All of this is being well received by creditors and credit rating agencies. As such, the firm is in the process of getting upgrades to its credit ratings. This should be positive for the other CCA non-convertible preferred series shares (CXW-A NASDAQ), which pay an 8% quarterly dividend. The shares may well still be called, but since they still trade at a discount to the call price of 25, even it they are, that's fine. But given the company's current dealings to buy back some of the other preferreds, I expect we'll have some time to collect the fat dividend before the company calls the shares. For now, buy the preferred series only below 25 since the common shares will face some dilution near term. With the new share sale, the preferred should be the prime vehicle. However, after the dust settles in the new share sale, we can then look at the common shares as well. In addition, if you buy individual bonds, the CCA debentures 9 7/8% bonds due 05/01/09 should be bought under 10, giving a yield to the next call on 05/01/09 at a price of 104.9 in excess of 7.75%.”

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