Wedbush Analysts Help Private Prison Firm GEO Group to Break Out
"Big Short" investor and outspoken bear Michael Burry recently boosted GEO Stake by more than 300%
Private prison operator Geo Group's (US:GEO) shares staged a breakout this week, rising more than 15% through Wednesday after an analyst upgraded the stock and said several factors could drive demand.
The stock traded near two-year highs on Wednesday.
Wedbush Securities analysts said this week that GEO might benefit from the United States' Intensive Supervision and Appearance Program. The program covers individuals released from prison and monitored with devices like GEO makes while their deportation cases resolve.
The analysts said GEO's electronic-monitoring devices are a high-margin, growth business. The government's plans to expand its monitoring program to replace detention provide a tailwind.
The analysts raised their price target to $14 from $10. They cited a US district judge's order halting Trump Administration enforcement of Title 42, a rule that allows the US to turn back people trying to immigrate to the US from Mexico, saying that could drive demand.
"Assuming that this new ruling is not opposed, we anticipate a removal of Title 42 restrictions starting on Dec. 21, 2022," the Wedbush analysts said. "We believe this news should represent an incremental positive catalyst for both (GEO rival) CoreCivic (US:CXW) and GEO on the potential for increased demand from Immigration and Customs Enforcement for detention capacity."
The Republican's slim margin in the incoming US House of Representatives will likely assure gridlock and leave border funding in question. However, it's still possible that Washington could make appropriations for more ICE detention beds and add revenue to the company's private prison business.
The analysts said GEO's electronic-monitoring business is well-positioned to benefit from growing political support for detention alternatives.
Wedbush said revenue in GEO Group's electronic-monitoring business jumped 81% year over year in the third quarter. Net operating margins for that business were above 50%.
In August, GEO restructured several debt issues that could allow buybacks or dividends. The analysts added that rising wages are the company's most significant headwind.
GEO made headlines in August when Michael Burry, immortalized in the book and movie "The Big Short" and an outspoken bear on stocks revealed in a 13F filing with the Securities & Exchange Commission that his firm, Scion Asset Management LLC, liquidated all his equity holdings except GEO.
Burry added five new positions and increased his GEO stake by more than 300% in the third quarter to just over two million shares, or about $15 million.