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GEO Team – Too Substantially Pessimism Gives Possibility

– By Praveen Chawla

The GEO Team, Inc. (NYSE:GEO) is a jail operator structured as a genuine estate investment have faith in (REIT). It describes itself as specializing in the structure, funding, growth and procedure of safe amenities, processing centers and local community re-entry facilities in the United States, Australia, South Africa and the United Kingdom.

GEO’s around the world operations include things like the possession and/or administration of 118 facilities totaling around 93,000 beds, including idle facilities and jobs below advancement, with a workforce of up to close to 22,000. Most of its revenues and revenue are derived from the U.S.

GEO’s stated mission is to acquire public?personal partnerships with federal government agencies all around the world supplying improved rehabilitation and local community reintegration courses for the prisoners contracted underneath it. GEO and CoreCivic (CXW), the two companies that manage federal prisons in the U.S., on your own merge for 17 agreement amenities that accommodate all around 13% of the Federal Bureau of Prison’s (BOP) complete potential of around 9,800 inmates. The BOP signifies 14% of Geo’s 2020 earnings.

GEO Team – Way too A lot Pessimism Provides Possibility

The company’s inventory selling price has been crushed simply because of the the latest executive order to the Federal Bureau of Prisons to not renew contracts with private jail operators heading ahead. Further, because of to social pressures and ESG mandates, a lot of fiscal establishments have said that they will withdraw from lending money to personal prison operators.

On April 7, GEO suspended its quarterly dividend payments, with the goal of maximizing the use of cash flows to repay credit card debt, deleverage and internally fund expansion, and its stock rate collapsed more. It is doable that GEO may well transform from an REIT to a C-Corp to navigate its present funding problems and impending non-renewals.

The pursuing charts give the firm’s revenue and web working income distribution, respectively.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Team – Way too A lot Pessimism Presents Option

GEO Group - Too Much Pessimism Provides Opportunity

GEO Team – Way too Much Pessimism Presents Option

Geo team is very very leveraged with debt of $9 billion and equity of only $2.1 billion. The sector capitalization is only $690 million.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Group – Also Substantially Pessimism Provides Possibility

The subsequent chart displays the program of credit card debt payment.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Team – Much too Significantly Pessimism Gives Chance

$1.7 Billion of credit card debt arrives because of in 2024. Hence, GEO has about 3 many years to figure out how to reschedule or repay this bolus of maturing debt. That will in change count on GEO’s skill to market or re-lease the attributes which are not getting renewed by the federal authorities.

I consider the enterprise has sufficient to time to promote or re-lease the houses which the BOP is not renewing. There is a superior probability the BOP ifself will invest in the attributes from GEO, or just hire the house and operate it by itself, as it would be more affordable that building a new tailor made facility. We will just have to wait and see how the chips slide in the quarters forward.


I assume a excellent way to value the enterprise is by the projected FCF process. The method utilizes a mix of 6 many years of normalized free cash move and 80% of ebook benefit.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Group – As well Considerably Pessimism Provides Possibility

It is developed for businesses which have relatively erratic hard cash movement from calendar year to calendar year. This method indicates a benefit of $16 a share and exhibits appreciable margin of protection as the inventory cost is underneath $6 presently. It indicates a 150% upside.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Team – Way too A lot Pessimism Supplies Prospect


Searching at the chart below around the past 20 decades, GEO has in no way traded at such a discounted from its projected FCF benefit. Obviously, the stock industry is anticipating GEO to be at high hazard of insolvency around the upcoming a few years. When that pessimitic circumstance is not unreasonable, I assume there is a larger chance that GEO will muddle by means of by offering off unneeded property, and consequently this industry despondency represents an chance for traders with a extremely very long phrase horizon and a higher tolerance for threat.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Group – Also Significantly Pessimism Delivers Option

Disclosure: The writer owns stock of The GEO Team Inc.

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This posting initial appeared on GuruFocus.