Here's Why Private Prison Stocks Rebounded Today
The U.S. Department of Justice announced plans Thursday to phase out its use of private prisons, sending the publicly-traded companies in the industry, Corrections Corporation of America CXW and the GEO Group GEO , tumbling as much as 40%. However, both stocks bounced back on Friday after investors realized that the Justice Department’s decision wasn’t necessarily a death notice for both companies.
After a horrific day of trading Thursday that caused both stocks to be temporarily halted, CXW gained about 8.6% on Friday, while shares of GEO rallied an impressive 21.4%.
(Also Read: Is This the End of the Private Prison Industry ?)
Several key questions were raised following Thursday’s announcement that eventually helped these companies regain some of their lost value. First of all, the DoJ is not terminating any of its contracts; instead, it will simply not renew any contracts once they run out.
Some of these contracts will not be up for renewal for another five years, which gives the successor to the Obama administration time to potentially change this policy and not follow through with the plan.
Furthermore, investors seemed to realize the limited scope of the DoJ’s decision. Technically speaking, yesterday’s announcement only applies to the 13 privately-run prisons in the Bureau of Prisons system. For Corrections Corp., that’s just seven percent of its annual business, while GEO Group relies on the BoP for about 16% of its revenue.
For now, both companies will still be able to do business with the U.S. Marshals, the U.S. Immigration and Customs Enforcement, and governments at the state and local level. If these other entities were to follow in the footsteps of the DoJ, then Corrections Corp. and GEO Group could be in some serious trouble.
It’s also worth noting that GEO Group operates facilities in Australia, South Africa, and the United Kingdom. Any international business from either company would obviously remain untouched after the DoJ’s decision.
If you’d like more commentary about the future of the private prison industry, check out this week’s episode of the Zacks Friday Finish Line podcast, as the hosts took time to discuss the DoJ’s decision:
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