– By Praveen Chawla

The GEO Team, Inc. (NYSE:GEO) is a jail operator structured as a genuine estate investment decision rely on (REIT). It describes by itself as specializing in the style, funding, development and procedure of safe amenities, processing centers and group re-entry facilities in the United States, Australia, South Africa and the United Kingdom.

GEO’s all over the world functions involve the possession and/or management of 118 services totaling about 93,000 beds, such as idle services and initiatives less than advancement, with a workforce of up to approximately 22,000. Most of its revenues and income are derived from the U.S.

GEO’s stated mission is to create community?non-public partnerships with government agencies all around the world furnishing improved rehabilitation and community reintegration programs for the prisoners contracted below it. GEO and CoreCivic (CXW), the two companies that manage federal prisons in the U.S., by yourself incorporate for 17 deal facilities that accommodate all over 13% of the Federal Bureau of Prison’s (BOP) full capacity of around 9,800 inmates. The BOP represents 14% of Geo’s 2020 income.

GEO Team – Much too Significantly Pessimism Supplies Possibility

The company’s inventory price tag has been crushed due to the fact of the recent executive order to the Federal Bureau of Prisons to not renew contracts with private jail operators going forward. Additional, thanks to social pressures and ESG mandates, numerous economic institutions have mentioned that they will withdraw from lending dollars to non-public prison operators.

On April 7, GEO suspended its quarterly dividend payments, with the intention of maximizing the use of income flows to repay personal debt, deleverage and internally fund advancement, and its inventory price tag collapsed more. It is attainable that GEO may convert from an REIT to a C-Corp to navigate its current funding troubles and impending non-renewals.

The subsequent charts give the company’s income and net functioning revenue distribution, respectively.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Team – Far too A great deal Pessimism Gives Chance

GEO Group - Too Much Pessimism Provides Opportunity

GEO Group – Far too Substantially Pessimism Supplies Opportunity

Geo group is very remarkably leveraged with debt of $9 billion and equity of only $2.1 billion. The market capitalization is only $690 million.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Team – Way too A lot Pessimism Gives Prospect

The pursuing chart displays the routine of personal debt payment.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Group – Also Considerably Pessimism Offers Option

$1.7 Billion of personal debt arrives owing in 2024. For that reason, GEO has about three many years to determine out how to reschedule or repay this bolus of maturing personal debt. That will in convert depend on GEO’s ability to market or re-lease the homes which are not being renewed by the federal government.

I imagine the organization has sufficient to time to sell or re-lease the homes which the BOP is not renewing. There is a fantastic likelihood the BOP ifself will get the houses from GEO, or just lease the residence and run it alone, as it would be much more inexpensive that setting up a new personalized facility. We will just have to wait around and see how the chips fall in the quarters ahead.

Valuation

I imagine a excellent way to benefit the firm is by the projected FCF method. The system takes advantage of a mix of six a long time of normalized free of charge cash stream and 80% of ebook value.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Team – Far too A great deal Pessimism Provides Chance

It is designed for organizations which have fairly erratic dollars flow from 12 months to 12 months. This method suggests a worth of $16 a share and demonstrates sizeable margin of protection as the inventory selling price is underneath $6 presently. It indicates a 150% upside.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Group – Way too A great deal Pessimism Gives Prospect

Summary

Hunting at the chart underneath more than the last 20 a long time, GEO has under no circumstances traded at these types of a low cost from its projected FCF worth. Evidently, the stock marketplace is anticipating GEO to be at significant hazard of insolvency in excess of the subsequent three yrs. Though that pessimitic situation is not unreasonable, I consider there is a larger prospect that GEO will muddle by by advertising off unneeded assets, and hence this current market despondency represents an prospect for traders with a incredibly extensive expression horizon and a substantial tolerance for possibility.

GEO Group - Too Much Pessimism Provides Opportunity

GEO Group – Far too Considerably Pessimism Delivers Opportunity

Disclosure: The creator owns stock of The GEO Team Inc.

Study a lot more here:

Not a High quality Member of GuruFocus? Signal up for a absolutely free 7-day demo listed here.

This post very first appeared on GuruFocus.