Cannacord Sees Election Rhetoric Limiting Prison REIT Upside

• The GEO Group Inc GEO shares are down 14 percent since October 12, while shares of Corrections Corp Of America CXW have lost 12 percent.
• Canaccord Genuity's Ryan Meliker maintained a Buy rating for GEO Group and a Hold rating for Corrections Corp.
• Election rhetoric propagating the closure of the private prison industry would limit upside for private prison REITs in the near term, Meliker stated.

With election rhetoric propagating a shutting down of the private prison industry, the private prison REITs could face substantial headwinds in the near term, which would limit upside to the stocks in the coming months, analyst Ryan Meliker said. He added, “We believe the anti-private prison presidential stance is largely a posturing move.”

The costs associated with this would be extremely high, and unlikely to be approved by Congress. With the Congress unlikely to pass the inflated budget and in view of the jurisdictional control, the actual exposure of the prison REITs “is minimal at best,” Meliker wrote.

The current dividend yields are around 8-10 percent, which limits near-term downside. The analyst believes that yield-oriented investors would support the stocks at yields above 10 percent, given the steady cash flows and high coverage levels.

In the report Canaccord Genuity noted, “Additionally, we don't expect the elimination of private prisons across the US or sentencing reform to have negative cash flow implications and maintain our favorable view on the industry’s fundamentals.”

The companies have positive fundamentals and heavily discounted valuations. Given these, patient investors are likely to be “rewarded with material upside to the stocks over time,” Meliker commented.

The sentencing reform would be less detrimental to GEO Group and Corrections Corp than is being currently perceived, the analyst stated, citing the state prisoner capacity and the portfolios of the two companies. The price target for GEO Group has been reduced from $43 to $37, while that for Corrections Corp has been lowered from $31 to $30.