How to profit from a 'police state'

The company is poised to benefit from rising demand from states and federal immigration agencies that are overwhelmed by their rising criminal and detainee populations and see an outsourced solution provider as an ideal partner. Governments hate being in the business of building prisons and dealing with bad guys, so per diem fees are steadily marching higher for Geo and its peers because of a real lack of capacity.

In a nutshell, when rising demand meets stagnant supply, companies can raise prices and profitability soars. Figure that the company can earn $1.70 a share in 2009 on revenues of about $1.1 billion. With a price-to-earnings multiple of 23 -- reasonable for a company growing at better than 20% -- shares could get to $39, a 34% move from here. It won't be a straight shot, though, as bad things happen at prisons from time to time that can temporarily pressure a stock like this -- and facility populations can vary from quarter to quarter, making earnings somewhat unpredictable.

Meanwhile, Corrections Corp. operates around 65 correctional, detention and juvenile facilities in the United States with a total capacity of more than 72,000 beds in 19 states. It also provides prisoner-transportation services through a subsidiary. The company has been racking up contract wins in the past few months, with a 7,772-bed deal from the California Department of Corrections in October probably the most emblematic since it replaced a 5,670-bed contract with the same agency.

The company also recently announced it would now begin building a new 3,060-bed correctional facility in Eloy, Ariz., to house its overflow of California inmates starting around this time next year. Some of its other California inmates will go to its Tennessee and Florida operations. I figure the company can earn $1.71 a share in 2009, which with a price-earnings multiple of 23 would put the stock at around $39, up 40% from the current quote.

Backing up the truck

And finally Brink's offers a whole different take on the idea as it provides home-security systems and services, armored-car transportation, airport security and guard services. The company reported strong earnings last week with all segments hitting their marks.

The company's international business, such as armored transportation in Latin America, was a standout, while the residential-housing crunch did put a bit of a damper on the home-security business, which was up just 1.6%. Fortunately that was offset by commercial-security results, which rocked. I figure the company can protect itself and shareholders by earning as much as $3.52 a share in 2009, which would put the stock at $81, up 26% from today's price, on a P/E of 23.

• Video: Entrepreneur inmates

I'm not crazy about the state of affairs that has led to prisons being a growth industry, but investors need to play the hand they're dealt. Lock 'n' load.

Fine print

Click here to visit the Santa Fe Institute think tank's site. . . . Click here to visit the Justice Department Web site or here to go straight to the 2006 crime statistics. . . .

Click here to visit the GEO Web site. . . . Click here to visit Brink's. . . . Click here to visit Corrections Corp. or here to see their recruitment video for military veterans.

Meet Jon Markman at The Money Show

MSN Money's Jon Markman will be among more than 120 investment and finance experts sharing buy-and-sell advice at The World Money Show in Orlando, Fla., Feb. 6-9. Invest four days dedicated to planning and refining your portfolio by attending the event's more than 320 workshops and panel presentations. Admission is free for MSN Money readers.

Call 1-800-970-4355 and mention priority code No. 009554, or register online today.

At the time of publication, Jon Markman did not own or control shares of any of the companies in this column.

< previous |  1 | 2 |