CoreCivic

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

CoreCivic is a diversified government solutions company with core specialities in corrections, detention, and residential reentry facilities. They manage a variety of facilities for state and federal governments across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

CoreCivic, formerly known as Corrections Corporation of America, is a real estate investment trust (REIT). This unique structure has specific implications, which must be considered during valuation and analysis. In the past year they announced and fully transitioned to their new structure as a private prisons company. The company does not seem to generate its revenue in a recurring fashion, though their business model of long term contracts, does bring some stability.

CoreCivic’s revenue is derived from three main segments:

  • Safety: This segment primarily encompasses the company’s correctional facilities, providing housing, security, and other inmate-related services. It is the largest contributor to revenue.
  • Community: The community segment includes residential reentry facilities, offering programs and services aimed at assisting formerly incarcerated individuals in their reintegration into society.
  • Properties: This segment includes real estate operations and real-estate related investments, such as the sale of properties. It also includes revenue from managing facilities that the company does not own.

The safety segment is the largest and most important for CoreCivic. Therefore the company’s performance is heavily correlated to the size, profitability and occupancy of this segment.

  • Government Reliance on Private Prisons: The industry is primarily dependent on government entities for contracts. Shifts in government policies or budget constraints significantly affect revenues.
  • Public and Political Pressure: Public and political scrutiny surrounding private prisons impacts the industry. Negative media attention and legal challenges could affect the contracts.
  • Growing focus on Reentry Services: There is an increased emphasis on rehabilitative programs and community-based solutions.

Financials in-Depth

  • Historical Performance:
    • The company has shown fluctuations in financial performance, partly due to changes in government contracts and legal proceedings, which can be seen in the inconsistency of its revenue growth.
    • Due to its REIT history and accounting conventions, earnings quality is not easy to assess. Therefore, a deep understanding of its financials is essential for valuation.

    Operating revenues for the three and nine months ended September 30, 2023, were $515.5 million and $1,512.3 million, respectively, compared with $487.0 million and $1,449.0 million, respectively, for the three and nine months ended September 30, 2022. Net income was 121.1 million vs. 109.1 from last year’s quarter. Net cash generated from operating activities was $186 million in September 30th 2023 vs. $77 million from a year ago.

  • Margins: Profit margins are relatively stable (between 13-18%) if non operating activities are removed, and show signs of increased efficiencies, but are heavily dependent on occupancy rates and the structure of contracts with government agencies. Inconsistent and volatile revenue makes analysis hard.
  • Competitive Landscape:
  • The industry is dominated by a few major players, including CoreCivic, GEO Group, and Management and Training Corporation (MTC), which compete directly with them. Each of these competitors has similar strengths and weaknesses.
  • Competitive intensity can lead to lower contract prices and can influence the terms and conditions of these contracts and subsequent profits.
  • What Makes the Company Different:
    • CoreCivic is well positioned as one of the largest private prison providers, and therefore has substantial experience and scale.
    • They are moving toward a focus on rehabilitative services and community reentry programs in addition to traditional incarceration.
    • They have unique partnerships with many government agencies and a wide range of facilities.

Moat Analysis

  • Sources of Competitive Advantage:
    • Scale and Experience: CoreCivic is one of the largest players in this sector, and that scale might lead to cost efficiencies but these savings are not evident in the financials, and not enough to become a true competitive advantage.
    • Long Term Government Contracts: These contracts provide stable revenues and somewhat predictable cash flow, but they are always up for renewal and are highly dependent on government budgets and changes in political climates.
  • Switching Costs: Government agencies are often tied to specific vendors, but switching costs are not a very strong competitive advantage because they can chose competitors upon a contract expiring. The cost of switching companies is fairly low, making it easy for clients to switch providers.
  • Moat Rating: 2/5
    • The company has some advantages in terms of scale, experience, and contracts. However, barriers to entry are not high and competitors are almost always available to fill roles.
    • The company’s business model relies on multi-year contracts which allows some stability. However, contract renewals are not certain, government policies are unpredictable, and the public and political opinion does affect their performance. These make a large impact on long-term performance. The company has many small moats but do not have any large moats.
    • The company faces tough competition, they don’t have any intangible assets, have very similar products to competitors and are susceptible to political and social shifts.

Risks to Moat and Business Resilience

  • Political and Regulatory Risks: Changes in government policies can lead to early termination or non-renewal of contracts, which are a major threat to revenues. Government budget cuts and changing priorities are all major risks.
  • Public Perception and Social Pressure: The increasing public awareness and disapproval of private prisons can lead to decreased acceptance of the company.
  • Competition: Other private prison providers are also aggressively seeking to grow market share which can lead to margin compression and an increase in competition among providers.
  • Operational Risks: CoreCivic’s performance depends on its ability to manage facilities efficiently. Operational challenges or issues with the facilities could result in decreased occupancy or financial penalties.
  • Financial Risks:
    • The company is affected by changing interest rates, because a substantial portion of its funding is tied to floating interest rates, increasing expenses in rising interest rate environments.
    • Their financial health is below the average of its peers. They have a significant amount of debt, and any economic problems could create significant financial issues.
  • Employee Relations:
    • The company may struggle to hire enough employees, especially those with medical or security training, making it hard to keep operations running smoothly. Employee turnover, and employee related issues might also affect the company’s performance.

Understandability Rating: 2/5

  • CoreCivic’s business is far from a typical business model, especially after their recent transition. It has strong ties to government policies, which are difficult to model. It is hard to understand from the outside how they generate value and if the company is acting according to that understanding. There are some complexities in its operations and finances due to the REIT structure transition. It also has complex contracts with many different entities that are also difficult to understand.

Balance Sheet Health: 3/5

  • The company carries a substantial debt load, which adds financial risk, even though some debt comes in long term and low rates. This increased leverage lowers the company’s financial flexibility.
    • Cash flow is volatile and somewhat unpredictable.
    • They have made moves to strengthen their financial position in 2023 by refinancing debt, however they will need to remain committed to these principles.

Recent Concerns / Controversies and Problems

  • Transition from REIT: This major shift in business structure has been creating uncertainty around its financials and its future. * Their earnings report is more complicated due to the transition and makes comparisons to past data difficult.
  • Occupancy Rates: The company has reported recent occupancy challenges, they have decreased occupancy in many facilities.
    • Any reduction in occupancy directly affects their operating margins, and financial position. However, they are working on attracting and securing new clients to remedy this issue.
    • High occupancy rates are very important to their success, since lower occupancy results in higher costs and lower revenues.
  • Decreased Guidance: The company recently reduced the lower end of their revenue guidance, which was received poorly by investors, and was a result of slow new contract approvals. This could lead to the company not meeting its future targets or expectations.
    • Despite this, their management team expressed strong optimism that revenue and earnings will still meet expectations for this year and will provide strong guidance for the year to come.
  • Debt: A major concern for the company is its high levels of debt, which they have used to pay out large dividends and to grow their facilities and business. They will need to manage it responsibly and pay it down.
  • Legal Issues: Due to the sensitive nature of its business, the company is exposed to many legal liabilities and lawsuits from various groups. These can significantly affect their operations and financial performance if they do not win their suits or lawsuits.
    • There was a big discussion of this during their last conference call, and they stated that they are very careful and very cautious of these, and are very competent in handling them.
  • Revolving Credit: They are increasing borrowings to finance their operations and new capital expenditures using their new Revolving Credit Facility. How this new credit line affects them needs to be watched closely, but does increase flexibility in some ways. * The company mentioned they are carefully managing debt levels and have confidence they will be able to service debt.