Invest in prisons - and lock in defensive growth

published 7 August 2006

With violence flaring up in the Middle East and the global economy looking shakier, eyeing up some defensive stocks seems a sensible move. One area with a solid growth outlook in good and bad times, and often overlooked by investors, is private prisons. Britain's private prisons market looks set to boom in the coming years, according to Luke Johnson in The Sunday Telegraph; the next government is likely to build more prisons in order to clamp down on crime, and with little public money available, the task will be farmed out to the private sector.

At present, however, there are no pure-play UK investments on offer, so for now investors should consider the US market. As Palash Ghosh points out on BusinessWeek.com, US prisons are "bursting at the seams" by mid-2005, US jail facilities were operating at 95% of capacity and the prison population is expected to keep expanding by an annual 3%-5%. Private prison operators are in a position to provide new facilities at a lower cost than cash-strapped state or federal governments, so there is plenty of scope for private firms to take more inmates off governments' hands and thus for prison outsourcing to keep expanding. Currently, 6.7% of prisoners are under the control of the private sector. And the industry is now in for an additional fillip: the federal government's clampdown on illegal immigrants means that the number of migrants held in detention facilities every night is expected to increase by 32% in a year. Analysts expect most of the beds needed to be provided by private firms. No wonder the chief executive of market leader Corrections Corp (CXW, $55), which operates 63 facilities in 19 states, recently said that "we've never seen the wind at our back like it is today".

Other players are Cornell (CRN, $16) and Geo Group (GEO, $41), although Corrections is deemed most promising. Wayne Williams of Brazos Capital Management says it can "predictably provide" 20% annual earnings growth, while TC Robillard of Bank of America, citing its position as the biggest beneficiary of the demand/supply imbalance, sees scope for the stock, on a price to earnings growth ratio of one for this year, to rise by nearly 20% from current levels.