Why Deutsche Bank Prefers CoreCivic Over GEO Group

In a note released Tuesday, Deutsche Bank said it prefers Corecivic Inc CXW over The GEO Group Inc GEO, going by the exposure each of these has to the Immigration and Customs Enforcement, or ICE.

Focus On Immigration To Help

Analyst Kevin McVeigh and Ato Garrett believes the new administration's focus on immigration would benefit the private prison industry. The preference of CoreCivic over The Geo Group is due to the higher exposure of the former (28 percent compared to 23 percent for the latter) to ICE.

Deutsche Bank is of the view that CoreCivic's fourth-quarter earnings beat was primarily due to higher than expected occupancy at ICE facilities even before President Donald Trump was inaugurated. Added to that, the firm noted that there is potential for higher occupancy rates in ICE facilities due to Trump administration's policies.

Related Link: Homeland Security Reportedly Needs More Beds For Immigrant Detainees In Big Windfall For Private Prisons

Execution Of Executive Orders Likely Only In 2018

Trump issued two executive orders in the first week of his presidency: One on Border Security and Immigration Enforcement Improvements, and another on Enhancing Public Safety in the Interior of the United States. Deutsche Bank sees this clamp down on illegal immigration having positive implications for the private corrections industry as well occupancy rates.

However, the firm believes material implementation of these orders may not materialize near term, as Congress was not consulted prior to the signing of the orders. The firm expects only portions of the executive orders such as more CBP agents and detention facilities to be implemented, that even only in 2018.

Elevated Family Apprehensions

Citing the recent customs and border protection data, the firm noted that apprehensions, specifically family apprehensions, have risen 109 percent year-over-year for the Southwest border. This, according to the firm, would benefit CoreCivic at its 2,4000 bed South Texas Family Residential.

Given that CoreCivic has 13,000 vacant beds in inventory, the firm estimates that if activated these beds offer $125 million to EBITDA. This compares to the $35 million to $50 million EBITDA potential the firm estimates for The Geo Group, going by 5,000 vacant beds in the inventory.

Concluding, Deutsche Bank said it awaits more clarity on the timing of more stringent criminal justice reform and immigration enforcement. That said, the firm believes the risk/reward is positively biased.

Rating And Price Target

• CoreCivic: Buy, $38.
• The Geo Group: Hold, $47.

At Time Of Writing

• CoreCivic was rallying 1.94 percent to $34.71.
• The Geo Group was adding 2.19 percent to $47.17.

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