CoreCivic Shares: Political Uncertainty Leads to Lower Ratings (NYSE:CXW)

Introduction

CoreCivic (NYSE:CXW), the owner of correctional facilities, has recently faced stock price volatility. The company’s stock is up about 50% in the fifteen months since I wrote that last bullish sentence. year. Unfortunately, the company announced the termination of the company’s contract with ICE for its Dilley detention center, and that sent stocks on a wild ride of volatility. While the outlook for CoreCivic’s dormant assets may look promising, the upcoming election has me downgrading the stock to a hold until the US political outcome is more known.

CoreCivic Earnings

Despite the political difficulties facing CoreCivic, the company has grown sales and profits. In the first half of 2024, CoreCivic’s revenue increased by $70 million, or nearly 8%, compared to the same period a year ago. Costs also rose, led by a $37 million increase in operating expenses. CoreCivic was able to control its assembly increasing costs to $44 million, which was less than the increase in sales. What hurt the company’s profitability in the first half of the year was debt repayment, which required it to take a $31 million charge. Despite this one-time charge, net income was still up $1 million to $28 million in the first half of the year.

CoreCivic’s balance sheet consists largely of real estate assets and accounts receivable on the asset side and long-term liabilities on the liability side. Investors should note that the company holds less than 50% of its net asset value in debt, which is a manageable amount of leverage. One concern is the drop in cash from $121 million to $60 million. Shareholders’ equity fell to just under $1.45 billion.

CoreCivic’s cash flow statement can provide insight into what has led to the decline in cash on the balance sheet. Cash flow from operations, or the company’s ability to generate daily cash, increased by $13 million to $138 million in the first half of 2024. After accounting for capital expenditures, free cash flow increased , also at $107 million. CoreCivic poured most of its free cash flow into debt reduction in the first half of the year, but it also bought back $69 million worth of common stock.

A look at CoreCivic debt

CoreCivic retired $593 million in debt maturing in 2026 in the first half of 2024. The company used proceeds from a $500 million debt offering maturing in April 2029, $25 million from the Company’s revolving line of credit and cash available to pay the notes. Investors should note that the new debt offering was at the same coupon rate as the old debt offering and slightly lower in principal, meaning the refinancing created a slightly lower future interest expense.

The refinancing of the 2026 notes greatly improved the maturity profile of CoreCivic’s debt. The company has less than $35 million of debt coming due in the next three years and doesn’t face a significant maturity until 2027, when $262 million will fall due. I’ve been a big fan of CoreCivic debt in the past, and at one point they generated good returns. However, like equities, debt has risen and I do not believe that investing in any debt at these levels will provide an attractive return for investors.

Why Rating Hold

Based on the share buyback disclosure in the 10-Q, it appears CoreCivic’s management has engaged in a share buyback after falling below $12 per share in June. While share buybacks can lower the company’s stock price, I’m not a fan of buying stock at $14 per share. Additionally, the company’s cash balance is lower now than it was before the buyback, and while CoreCivic has nearly $300 million in cash, borrowing money to buy stock wouldn’t be in the long-term interests of shareholders.

Additionally, terminating Dilley’s contract takes a big bite out of earnings. According to the earnings call, the Dilley contract represented 11 cents per share in earnings for the quarter, or 44 cents per share for the year. Analysts have already revised their estimates for 2025 to reflect the loss of the Dilley contract. Regardless of the outcome of the election, investors will face a lame-duck government this winter that could terminate several ICE contracts, further hurting CoreCivic’s earnings.

Risks to be on the sidelines

Just as additional contract cancellations can push rates lower; investors may miss out on a possible extension of CoreCivic shares. During the conference call, management made several comments hinting at increased interest in leasing idle facilities. There appears to be increasing demand for the use of detention centers near population centers, and CoreCivic could benefit from winning new contracts and seeing its share price rise.

Conclusion

CoreCivic shares have pulled back from June’s decline, but political uncertainties are too high to sustain a buy rating. Canceling the Dilley contract has wiped out more than 40 percent of next year’s earnings, and there’s no telling what the government’s attitude toward CoreCivic-owned facilities will be in the coming months. For now, I rate CoreCivic as a hold until there is more near-term certainty.