Investing $40M To Activate Facilities Will Meet Increased ICE And US Marshals Service Demand

Key Takeaways

• Policy changes provide CoreCivic opportunities for new contracts with ICE and US Marshals, potentially boosting revenue and increasing occupancy.
  
• Strategic contracts and reactivating idle facilities position CoreCivic for significant financial growth and improved earnings.
  
• Reliance on government contracts, policy shifts, and facility costs pose revenue volatility and short-term financial strain, despite long-term growth potential.

Catalysts

Owns and operates partnership correctional, detention, and residential reentry facilities in the United States.

• The change in presidential administration has led to significant policy changes that increase ICE's detention capacity needs, providing CoreCivic with opportunities for new contracts, potentially boosting revenue.
  
• CoreCivic is well-positioned to meet expected increased demand from the United States Marshals Service, which could require an additional 10,000 or more beds, thereby possibly increasing revenue and occupancy rates.
  
• The company is proactively preparing for facility activations and has outlined capital expenditures of $40 million to $45 million, which positions it to quickly capitalize on new contract opportunities and improve earnings.
  
• CoreCivic is in active discussions with state partners and has secured new contracts that could lead to higher occupancy and revenue growth, especially in facilities currently underutilized.
  
• The potential to reactivate idle facilities and expand occupancy through strategic contracts with ICE and other partners positions CoreCivic for significant EBITDA growth, enhancing overall financial performance.

CoreCivic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CoreCivic's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $211.9 million (and earnings per share of $1.92) by about May 2028, up from $68.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, down from 36.2x today. This future PE is lower than the current PE for the US Commercial Services industry at 27.7x.
• Analysts expect the number of shares outstanding to decline by 2.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

CoreCivic Future Earnings Per Share Growth

Risks

• The company's reliance on contracts with government entities such as ICE and the U.S. Marshals Service makes it vulnerable to changes in government policy, potentially impacting revenue volatility.
  
• The new contracts and higher demand expectations may be dependent on future congressional funding, which introduces uncertainty and potential risks to projected revenue streams.
  
• The potential requirement for facility reactivations involves substantial start-up expenses that could negatively impact short-term earnings until full utilization is achieved.
  
• Potential new legislative or policy changes under current or future administrations could decrease detention demands, impacting the company's occupancy rates and revenue.
  
• CORECivic's plans for future activations require increased capital expenditures which, despite providing long-term growth, could strain net margins in the short term.

Valuation

• The analysts have a consensus price target of $30.5 for CoreCivic based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $211.9 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 7.3%.
• Given the current share price of $22.78, the analyst price target of $30.5 is 25.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.