The Real Cost of Prisons Weblog

Government belt-tightening could be a boon for a range of mid- and
small-cap names whose share prices have in many cases fallen as far
as more cyclical companies that really do suffer in a downturn. And,
analysts say, that could present some stock market opportunities.

The housing slump has hurt public budgets, as depressed property
values and lowered homeowners' equity cut proceeds from real estate
and sales taxes.

In 2009, 25 states are facing shortfalls, according to the Center on
Budget and Policy Priorities. That pain trickles down to local
governments, which increasingly look to privatize services they
traditionally have performed.

By outsourcing a prison, states can save as much as a quarter of its
cost, Avondale Partners analyst Kevin Campbell said, which is why
private prison companies boosted their market share to 7.2 percent in
2006 from 6.5 percent in 2001-2003.

States might begin a new wave of prison privatization sooner than in
the 2001 recession because the United States is still suffering from
prison overcrowding as a result of that last downturn, Campbell said.

SHARES DOWN

Yet shares of Corrections Corp, the United States' largest prison
company, are down about 20 percent from their 52-week high of $33.25.

The story is similar with other prison companies. The Geo Group is
down about 19.7 percent from its 12-month high of $32.89 and Cornell
Companies is off about 24 percent from a high of $27.76.

"You would expect them to outperform given their defensive nature,"
Campbell said.
Corrections Corp and Geo's share prices are "compelling" in part
because they will reap business from California's prison bed
shortage, estimated at 60,000 beds or more, Lehman Brothers analyst
Jeffrey Kessler said.

California's projected 2009 budget shortfall, at $14.5 billion, is by
far the country's biggest, according to the Center on Budget and
Policy Priorities.

Kessler anticipates strong 2009 earnings for both Corrections Corp
and Geo.

A recession could also cause a spike in crime, resulting in a further
increase in demand for prison beds, Kessler said. "This would put
further wind at the back of the private prison companies."

Companies such as Tyler Technologies Inc, a provider of software to
local government, resist recessions well, said Eric Marshall, who
follows government services for the Hodges Small Cap Fund.

Tyler's stock is down about 14 percent for the year, but has
outperformed the Russell 2000 .RUT>, down about 18 percent for the year.

RECESSION-RESISTANT

The company is recession-resistant because it is "tied to the need to
process parking tickets and utility bills and those things are going
to happen no matter what," Marshall said.
Of course, downturns make local governments even hungrier to collect
that revenue efficiently.

The same dynamic supports Maximus Inc, a management consultant to
government, whose shares are down about 23 percent from their year
high of $48.33, partly because of a failed attempt to sell itself,
said Jeffries & Company analyst Matthew McKay.

Maximus has grown revenue in every downturn and expects a repeat
performance because the company's emphasis on efficiency appeals in
tight times, Chief Executive Richard Montoni said during a recent
conference call.

Maximus is set for a surprisingly strong showing in 2008, said McKay,
who has a "buy" rating on the stock and a one-year price target of $55.

Likewise, Medicaid administrator Providence Service Corp is trading
at $28.57, but Sidoti & Co. analyst Greg Williams' 12-month price
target for the shares is $37. He said he rates them a buy in part
because they're a "counter-cyclical play."

In 2008, California accounts for almost 18 percent of Providence's
$310 million Medicaid administration business, a direct result of the
state's budget woes, Chief Executive Fletcher Jay McCusker told Reuters.

"A recession drives clients to our business," said McCusker, adding
that Providence picked up new business in Florida, Virginia, Maine,
Illinois and Nevada during the 2001 recession. "We anticipate no
decrease in business even though state budgets may be flattening.