Catalyst In One Day
Tomorrow will be an exciting day.
We will get to see if the catalyst on this stock I have been talking about for two weeks actually comes true.
If it does I expect the equity to continue to move higher as incremental free cash flow is generated.
I love event type catalysts like this and it appears as if the market is finally figuring out the opportunity.
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It appears as if Title 42 will be removed tomorrow. A quick recap on Title 42 can be found in an article I wrote two weeks ago.
Since this article was published, prison equities are up meaningfully, with GEO Group (GEO) — the name I own — up 20%.
The removal of Title 42 is a real catalyst that could increase per bed capacity at ICE facilities across the U.S./Mexico border as migrants are processed into the system.
In addition, GEO’s electronic monitoring segment will likely see a huge surge in demand as migrants are given phones with GPS monitors so the Federal Government can track the movement of these individuals until they are fully processed into the system.
Should Title 42 get removed, economics for prison equities will quickly improve. ICE facilities across the border will fill up.
Given the high fixed cost model, every incremental individual will add a significant amount of incremental EBITDA.
As a reference on EBITDA contribution, average occupancy in the U.S. Secure Services facilities was 87.7% in the first quarter of 2023.
Pre-2020, before Title 42 was enacted, we were over 96%. EBITDA in 2022 was $360 million and in 2019 it was $400 million, meaning there is at least $40 million of incremental EBITDA opportunities.
In addition, GEO owns an electronic tracking business called BI. BI owns a GPS technology that tracks individuals through smartphones, smartwatches and ankle monitors.
What makes BI attractive is the exclusive contract that GEO has with ICE, called the Intensive Supervision and Appearance Program, through 2025.
With the contract, GEO gets 100% of the revenues of individuals processed through ICE that do not go through physical facilities.
Revenues have exploded here, up 80% in 2022, and should continue to grow if Title 42 is removed. This segment generated $270 million of EBITDA in 2022 and could grow significantly from here should Title 42 get removed.
Every news source I have checked indicates that Title 42 will be removed on May 11th. This will be a real short-term catalyst for GEO Group and I expect the stock will continue to move upwards.
The removal of Title 42 will help bring in additional free cash flow that GEO will use to paydown debt. As debt is paid down, the equity valuation should continue to improve.
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Disclosure: I long GEO Group (GEO). I will buy or sell my shares anytime following the publication of this article. This is not financial advice. I am not a financial advisor. Do your own due diligence.
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