Corrections Corp Of America (CXW), The Geo Group, Inc. (GEO): Is There Investment Opportunity in the Prison Sector?

In its latest fiscal year, The Geo Group, Inc. (NYSE:GEO) reported modest growth, with increases in revenues and operating income of 5% and 2%, respectively, compared to the prior year. Like Corrections Corporation, The Geo Group, Inc. (NYSE:GEO)’s sales growth benefited from increases in its compensated population and stable pricing in its daily rates.More importantly, the company’s divestiture of its non-core healthcare assets, as part of its REIT conversion process, has improved its profitability and cash flow metrics.

Of course, a potential risk to the outsourced prison model is funding challenges at the state level, which currently constitute almost half of sales for the industry’s top two players.Some states have chosen to reduce prisoner populations rather than to increase the size of funding.For instance, California has reduced portions of its prisoner population at the state level through its realignment plan, which transferred prisoners to local jurisdictions.

As a result, investors may want to look at companies that provide electronic monitoring technology, which provides security without the expensive brick-and-mortar facilities. 3M Co (NYSE:MMM) is a leader in this field through its Elmo-tech and Pro-tech units, competing against Corrections Corporation’s monitoring segment.With $4 billion in annual segment sales, 3M Co (NYSE:MMM)’s security unit is one of its key areas for future growth.

In its latest fiscal year, 3M Co (NYSE:MMM)’s security segment reported flat sales due to economic weakness in certain geographies, but it still generated a 4% increase in operating income.In the security area, the company has pursued growth primarily via the acquisition channel, including recent purchases of electronic monitoring and biometric identification companies.With $5.3 billion in total operating cash flow in 2012 and an annual research and development budget of $1.6 billion, 3M Co (NYSE:MMM) has the financial strength to build or buy dominance in the security segment.

Prison operators are a good choice for income-oriented investors due to high yields from their pass-through income.However, growth investors need to find a technology angle as governments look to maintain security while cutting funding levels.With a strong focus on its security segment and healthy operating margins across its business units, 3M Co (NYSE:MMM) is one to own.

Robert Hanley owns shares of Corrections Corporation of America and GEO Group. The Motley Fool recommends 3M and Corrections of America. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is There Investment Opportunity in the Prison Sector? originally appeared on Fool.com is written by Robert Hanley.

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