Corrections Corp Is Right To Restructure, But Headwinds Remain

Canaccord Genuity said headwinds remain for Corrections Corp Of America CXW.

CXW announced a restructuring of the company's corporate operations and implementation of a cost reduction plan. The plan includes cutting 12 percent of the corporate workforce at headquarters, and the CEO volunteering to forfeit restricted stock units granted earlier in 2016.

"We believe this is a step in the right direction for CXW, as the stock has traded off massively on the DOJ memo, as well as the DHS news. Yet, we continue to critically monitor the company's progress, as there are a number of catalysts on the horizon that may pressure the company further," analyst Ryan Meliker wrote in a note.

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Meliker, who has a Hold rating on the stock, await results from the renegotiation of CXW's South Texas Family Residential facility (accounting for about 25 percent EBITDA), which could result in half of that EBITDA being cut.

Furthermore, the analyst is monitoring sentencing reform and contract headlines, as BOP renewals are starting to come up for renewal. In addition, the ongoing ICE review progresses, and California's prop 57 nears its November vote are also on the radar.

"We believe cash flows, dividends, and debt covenants could be pressured further should any of these upcoming decision points not go in CXW's favor," Meliker highlighted.

"Some investors might read into this news as an advance warning that these risks are more likely to materialize. While that is possible, we believe it may be putting the cart before the horse," the analyst added.

Meliker, who has a price target of $21, is still concerned over federal contract cancellation headlines, a likely CXW dividend cut, and risk of a CXW covenant breach.