Geo Group (NYSE-GEO)
1. Worth $20-25 based on EBITDA. First way to look at it: Companies that exist within the Operations and Services segment of the Real Estate sector trade at an average EBITDA multiple of 9x. However, Geo Group only trades at 6.4x its 2023E EBITDA of $497.5 million. If Geo Group were to be valued at the multiple given to its peers, its shares would be worth $20.94 per share. Second way to look at it: It should also be noted that approximately half of Geo Group’s operating income is generated from their Electronic Monitoring division. Electronic Monitoring has far higher growth potential than Geo Group’s prisons, border facilities and rehab centers, as it represents a much more logical and civil way of monitoring migrants (as opposed to holding them in custody). See growth potential here: https://www.reddit.com/r/GeoGroup/comments/18aqm8y/fyi_geo_finally_reached_the_market_capitalization/
Due to this high growth potential, a much higher multiple should be placed on the earnings from that business. So overall, to be more accurate, one should apply a 9x multiple only to the traditional half of Geo Group’s business and a higher 15x multiple to the Electronic Monitoring half of the business. This results in a blended multiple of 12x. This multiple is not excessive (it is actually in line with the overall stock market) and results in a Geo Group valuation of $24.97 per share.
2. Worth $40 based on replacement cost. As an alternative way to determine the fair value of Geo Group shares, we can look at the replacement cost of Geo Group's assets minus its liabilities. To calculate the replacement cost of Geo Group's assets, I researched the construction cost of 25 recently built prisons in the United States. However, because prisons are different sizes, I looked at their construction cost on a per bed basis. The cost was $220,061 per bed. Given Geo Group owns prisons with 53,998 beds, that implies a $11.9 billion total replacement cost. Now that we know the replacement cost of GEO’s facilities, we can calculate the replacement cost of the rest of the company. To do that, we take the value of the company’s facilities, plus the value of the company’s cash and receivables of $0.6 billion, less all liabilities of $2.5 billion. $11.9 + $0.6 – $2.5 = $10.0 billion. Divide $10.0 billion by 123.5 million of shares outstanding = $80.91 per share. But aren’t new facilities worth more than older ones? Yes. GEO’s Secure Services facilities were built, on average, in 1998. Rule of thumb is that industrial building values decline at 2.5% per year. That means $80.91 per share for buildings built in 2023 = $35.78 per share for buildings built in 1998. But also importantly, all of the facilities have been renovated. The renovations would add back at least 10% to the value of the facilities. And $35.78 x 1.10 leaves us with a replacement cost of $40.88 per Geo Group share. See this detailed analysis on Replacement Cost here: https://www.reddit.com/r/GeoGroup/comments/18aqm8y/fyi_geo_finally_reached_the_market_capitalization/
3. Bonus: 15% Short Interest = Major short squeeze could get triggered. If the aforementioned deep value thesis is not compelling enough, also know that Geo Group has a 15% short interest. This is not as extreme as the 25-35% short interests one sometimes sees, but Geo Group’s deep undervaluation has two important short squeeze-related implications:
— 1) Geo Group could triple based on fundamentals alone, trapping shorts. Unlike almost every other stock with a high short interest, a massive squeeze could get triggered just due to a normalization of Geo Group’s valuation. Therefore, shorts could find themselves on the run and trying to cover their positions (causing even more buying) well before any involvement from the Reddit/WallStreetBets crowd.
— 2) Reddit users can risk far more capital on Geo Group vs other meme stocks. Last year when I ran some numbers, only 3 of the 25 most talked about meme stocks/short squeeze candidates had positive earnings. Because Geo Group trades far below its fair value (while every other meme stock trades far above their fair values), Reddit users can risk far more capital investing in Geo Group. Very simply, which meme stock are you more comfortable owning? – I know I’d be as comfortable investing $15,000 into a stock that trades at 6x earnings as I would be investing $5,000 in a stock with no earnings. The bottom line is that APES have triple the ammo bidding up Geo Group shares vs. other highly shorted meme stocks.
***Disclaimer: Prisons owned by private companies are subject to the same regulatory standards as government owned ones. And we all know the government never exceeds minimum standards. Furthermore, because Geo Group is a publicly traded company, there is a strong incentive for executives to ensure employees and managers don’t do wrong things. Otherwise, scandals create negative publicity, a lower stock price and unhappy shareholders – all of which directly negatively impact executives and their stock holdings. However, in government owned facilities, there is no mechanism to ensure that bad employees or managers are held responsible for their actions. Think of schools or police forces – their bad employees get away with almost anything. *This post does not constitute investment advice.
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