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The Ratings Game: Private-prison stock hits two-year high as analysts cite potential for more detention beds, detention alternatives

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Shares of private-prison operator GEO Group Inc. jumped to their highest level in roughly two years on Tuesday after Wedbush analysts upgraded the stock, citing a GOP-controlled House, possible changes in immigration policy and the potential for more demand in the company’s electronic-monitoring business.

GEO Group
GEO,
+15.98%

— which runs and does work for correctional and detention facilities — was up nearly 15% to 11.75 in late-afternoon trading. The advance put the stock at levels not seen since October 2020.

The Wedbush analysts, in a research note on Tuesday, said they were upgrading GEO Group to the equivalent of buy from neutral. They raised their price target to $14 from $10.

The analysts said their prior rating was based on “negative headwinds facing the private prison industry, including declining prison populations and political opposition to the business, along with questions surrounding the strength of the company’s balance sheet.”

They noted that this month, a U.S. district judge ordered a halt to the enforcement of Title 42, a national health measure that has allowed the U.S. to quickly turn back people trying to cross into the country from Mexico. The action was put in place under the Trump administration in 2020, at the start of the pandemic.

“Assuming that this new ruling is not opposed, we anticipate a removal of Title 42 restrictions starting on December 21st, 2022,” the Wedbush analysts said. “We believe that this news should represent a[n] incremental positive catalyst for both [CoreCivic Inc.
CXW,
+7.74%

] and GEO on the potential for an increase in demand from [Immigration and Customs Enforcement] for detention capacity,” the analysts said.

“While we did not see a ‘red wave’ in the recent midterm elections, Republicans are projected to take control of the House,” they continued. “This will likely lead to a locked-up Congress for the next couple of years, but we could still see a potential increase in funding for ICE detention beds and a heightened focus on border enforcement brought forward by the House.”

Currently, GEO Group’s electronic-monitoring business stands to gain from a shift in political sentiment toward detention alternatives, the analysts said, due to the growth of one such alternative, the Intensive Supervision Appearance Program. Under that program, individuals released after being detained are supervised via ankle bracelets, GPS tracking and home visits, according to the nonprofit Immigrant Legal Center.

Wedbush said revenue in GEO Group’s electronic-monitoring business jumped 81% year over year in the third quarter. Net operating margins on that business were above 50%.

The analysts said that in August, the company closed on several debt-restructuring deals that spread its debt burden out over a longer period of time. But they noted that GEO Group’s biggest financial challenge remained handling rising wages for workers.

Of the three analysts who cover GEO Group and are tracked by FactSet, two have a buy rating on the stock. Shares of GEO Group are up 52% so far this year. By comparison, the S&P 500 Index
SPX,
-0.27%

is down 17% year to date.

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