Tuesday, October 20, 2009

Bill Ackman's Value Investing Congress Pitch: Corrections Corp. of America (CXW)

Pershing Square's Bill Ackman is in the middle of a presentation entitled: Prisons' Dilemma about CXW. Details to follow.

Update with more detail from the presentation:

Long CCA (Ticker "CXW")

Rehashing the same ole private prison thesis:
Only 7.8% of nationwide inmates are housed in private facilities.
CCA does it cheaper, and "better".
In 2007, private prisons took ~50% of incremental industry "growth". (Trend is sloping up and to the right).
Currently industry (public + private) is operating at 94% occupancy. Doesn't see that declining as states can't afford to build new, current are overcrowded, and nationwide # of prisoners trends up and to the right [not sure why I'm channeling Dennis Gartman right now].

1) Recession is good for prison operators • More Crimes • States/Munis constrained to build new facilities
2) Operating Leverage from incremental prisoners is very high
3) Stock Buyback

Bought 8% of stock back in Feb / March (at $10.61, now trading at $24.50)
After-tax ROIC are 20-30% (low/high case). # of beds has increased from 46k to 61k in last 3 yrs, should be very accretive as occupancy on new beds increases.

5% of equity held by the Board.

##Bill made the point that he views this as a passive investment.

13x FCF, 12.2% Cap Rate (above where he thinks Realty Income will trade - Bill thinks its a good pair trade - see prior TILB post on Ackman's O short here)

Key Qualitative Investment Factors:
CRE Business
Govt is sole tenant
Triple-Net Lease (sorta)
LT Secular Growth
Low Maintenance Capex (~2%)
Local Monopoly/Nationwide Oligopoly
Best comp is a Healthcare REITs (trade at 7% cap rate)

From 1997 to 1999 operated as a REIT. Had to give up REIT status as a result of a large acquisition at the time. But at least it created a lot of NOLs.

Company makes much higher margins on owning & operating than just management contracts. Recently expanded # of beds in owned facilities. Increasing margins. 25-

33% of contracts roll each year, so decent predictability [TILB note: also allows for replacing in an inflationary environment].

All in all very simple.
Clearly a lot of regulatory risk, but Bill thinks its mitigated by supply / demand dynamics in incarceration industry.
Pershing owns 9.5% of company.