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The GEO Group's 2009 Q4 Conference Tells of Speculative Building, Stock Buybacks

On February 22nd The GEO Group announced their Q4 earnings in an investor conference call. CEO George Zoley said, "our financial performance in 2009 was the most successful in our company's history, achieving new highs in revenue and earnings results." The company reported a 2009 yearly revenue of $1.41 billion and $1.46 in earnings per share.

However, what struck me the most was the large amount of speculative building  - construction of additional beds without a contract to fill these expansions - the company has embarked on. Zoley explained:

"In Michigan, our 530-bed North Lake facility is being expanded by 1,225 beds. As you may be aware we have submitted this expanded facility in response to the Bureau of Prisons'  CAR-9 Procurement. CAR-9 was expected to result in an award of approximately 1,700 to 2,000 beds in late 2009 and early 2010... While the BOP continues to have a need for these beds, the decision on CAR-9 has been delayed primarily due to funding concerns related to the agency's future year budgets. As a result of this delay, we have decided not to assume any revenue contribution from our Michigan facility in our guidance at this time, and we continue to market this facility to other potential clients as well, and we hope to be able to activate this facility later in the year."

What Zoley did not explicitly state is that the North Lake facility is currently idle, and that the expansion project will cost $60 million. Spending this large amount of money on a facility that is not even listed on the company's website as an "existing facility" without a contract to justify the expansion is either very foolish or very insightful. This wasn't the only example of speculative building, though. Next, he stated:

"In Colorado, our 432-bed Aurora immigration detention facility is being expanded by more than 1,000 beds. We believe that our Federal clients, primarily ICE and the U.S. Marshals, will continue to need beds as they consolidate existing populations into larger facilities such as our expanded Aurora facility. However, we currently don't have a contract for the use of the expanded beds and therefore have decided not to include and revenue contributions from these beds in our initial guidance for the year."

Again, this is either very foolish or very insightful. However, evidence for the former appears everywhere as Colorado seeks state-level reform in their immigration detention because of inmate maltreatment. Additionally, ICE has recently come under fire for the deaths of 100 immigrant detainees in their facilities. The President has also suggested reforming immigration detention because of these alleged abuses. Business opportunities in immigrant detention could dry up based on these immigration reform movements, and for GEO to continue to invest their money in immigrant detention could be misguided. Zoley also spoke of a third facility that has yet to finalize a contract:

"As I discussed previously, we are also scheduled to complete construction of the new 2,000 bed managed-only Blackwater River facility in Florida by July 1 of this year. Again, we have decided not to include any revenue contribution from this facility in our 2010 guidance until the state of Florida notifies us regarding the facility's opening date."

The Blackwater River facility, if/when it is opened, will primarily fall under the jurisdiction of GEO Care, a mental-health subsidiary of The GEO Group. 

However, these speculative prisons were not the center of the conference call. The big news (for investors) came when Zoley announced their stock buyback program:

"...our board has authorized a stock buyback program up to $80 million effective through March 31st, 2011 as announced in our press release this morning. We expect to implement this program with an opportunistic strategy that maximizes the executory returns for our shareholders and does not impede our company's continued growth process."

The purpose of the program, as implied by Zoley, is to increase the price of their stock shares by buying back outstanding shares and leaving fewer shares on the market for sale. Decreasing the amount of available shares would increase the price per share, potentially giving a rise to their stock price.

What exactly caused the drop in share price is all speculative--whether the immigration reform movements or the allegations of rampant abuse in private facilities caused the drop is totally opinion-based. With Zoley claiming it was the company's best year in terms of revenue and earnings, it seems odd that the stock price would need a boost by way of a stock buyback program. Regardless, the day the buyback program was announced, The GEO Group stock (NYSE: GEO) saw a trade volume of 1,084,200 shares -- the largest amount of shares for GEO traded in a day since November 2008. That is, until ten days later when the CAR-9 solicitation was cancelled and just over 2 million shares were traded following the subsequent plummet of the GEO stock price by about $2 per share, the opposite of the intentions of the stock buyback program. However, since then the stock price has risen by about $1.50 per share despite the loss of the important CAR-9 solicitation, perhaps the buyback has achieved some of its intended effect. 

The remainder of the conference call was mostly the usual comments about how they are ready for future opportunities and that opportunities for growth exist. In general, the call was fairly standard procedure with the executives attempting to convince the shareholders that everything is well and good within the company. What will come of these speculative moves is something that will be of great interest. Only time will tell whether these often-hazardous speculative projects are beneficial or not to the company.

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