CCA picks up more Golden State business

Overcrowded California prisons lead to contract amendment worth millions; will a snowball roll eastward?

Email | Print By Geert De Lombaerde

Corrections Corp. of America is poised to provide upbeat 2010 earnings guidance later this week after signing an amended contract with the state of California that boosts the number of Golden State inmates it can house by more than a quarter.

Nashville-based CCA said Monday afternoon that its new contract with the California Department of Corrections and Rehabilitation gives it the right to house an additional 2,300 inmates at two of its facilities. Based on the company's 2008 financials, the amendment is worth about $48 million on an annual basis – 3 percent of total 2008 revenues.

CCA officials are scheduled to report their third-quarter profits on Wednesday. Analysts are looking for 32 cents per share on revenues of $423 million, but many eyes will be on next year's outlook. The company has not yet set its range; analysts' consensus is for profits of $1.36 per share on a little more than $1.7 billion in revenue.

Inmate transfers to CCA facilities in Arizona and Oklahoma will begin early next year and wrap up during the first quarter of 2011. CCA's contracts with California were last amended in January 2008 to lift the company's bed capacity to 8,132 inmates at five facilities. The two parties' agreement expires June 30, 2011.

California's decision to move more inmates out of state has been expected for a while. The state has been wrestling with overcrowding issues for years and were ordered early this year by a federal panel to cut the number of inmates in its prisons by a third.

Companies like CCA and its main competitors, the GEO Group and Cornell, were always likely to benefit directly from such a decision. But in a September research note, Avondale Partners analyst Kevin Campbell mused that an aggressive move by California to shift more prison beds to private management could have positive repercussions elsewhere in the country.

"If the California plan includes additional out-of-state transfers, we would not be surprised to see other states reserve capacity before it is no longer available," Campbell wrote at the time. "This would have a positive impact for pricing for the sector."

Shares of CCA (Ticker: CXW) rose more than 3 percent Monday to $24.69 and have been at or near 52-week highs for about two weeks. Year to date, they're up more than 50 percent.