GEO stock set to rise despite contract losses in federal prisons
President Joe Biden banned further contract renewals from the Bureau of Prisons (BOP) when he took office. But it didn’t stop GEO Group (NASDAQ:GEO) yesterday to raise its outlook for 2021 with its second quarter earnings report. Bottom line, the GEO stock should be doing well.
The Group will lose two BOP prison renewal contracts in the fall. However, GEO Group will not only survive but possibly prosper. For example, it raised its financial guidance for 2021 net income to a range of $ 167.5 million to $ 174.5 million on annual revenues of $ 2.23 billion.
This will mean good things for GEO stock, especially as investors expected bad news from BOP cancellations. I estimate that after his debt reduction plans, the stock could go up another 20%.
Where it leaves GEO Group
On the company’s conference call, the company’s executive chairman, George Zoley, said the enumeration at the facilities of its US Marshals has increased by about 10%. In addition, it welcomes more people with Immigration and Customs Enforcement (ICE) facilities, up 100% from last year. They were able to circumvent some of the US Marshals renewal bans by using other “intergovernmental agreements”.
The bottom line is that while he expects to lose two major BOP prison contract renewals in the fall, he has raised his forecast for this year. The reason appears to be that President Biden’s open border policies have allowed the company to hire more people on government contracts, but not on BOP contracts.
In short, the company will continue to be significantly profitable.
However, that leaves her huge over-indebtedness. Currently, GEO Group has long-term debt of $ 2.632 billion, plus $ 27.24 million in the current portion of that debt. This is a problem since interest charges consume a large portion of the company’s cash flow. In the last quarter alone, its interest expense was $ 32 million (on its quarterly income statement), or 76% of its $ 41.93 million.
The company tries to pay off some of this debt through asset sales, cash flow and other measures. His plan is to cut from $ 150 million to $ 175 million. But GEO may need to act faster if it loses more BOPs and other federal contracts.
However, the company has $ 483 million in cash, so its recourse net debt is only $ 2.1 billion. As of the last quarter, its Adjusted Operating Funds (AFFO) stood at $ 84.4 million, or $ 337.5 million on a run rate basis. This puts his debt at 6.22 times his AFFO. If its debt drops from $ 175 million to less than $ 1.95 billion in net debt, the ratio will drop to 5.7 times. This is still high, and GEO may have to reduce it to less than 4 times before the market is no longer affected.
What to do with GEO Stock
The company has not officially announced that it will be leaving its REIT (Real Estate Investment Company) status by the end of the year, but it is considering doing so. Currently, it does not pay dividends, although REITs must pay 90% of their net income in dividends. Thus, reverting to a regular C corporation, and not a REIT, would eliminate this requirement.
However, the market may not like GEO stocks if it does. Investors in REITs expect to receive a dividend. The company said on the conference call that even if it paid a dividend, it would likely be a non-cash stock dividend. This would dilute the shareholders. This would likely cause the stock to drop.
So I expect that they are no longer a REIT and act to reduce their debt. This will likely help drive GEO stock higher in the long run, especially if the company remains profitable and meets its higher profit targets for 2021.
As of the publication date, Mark R. Hake has a long position in Bitcoin but no other securities mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.