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October 22, 2009
Hedge fund manager sees big bucks in CCA
Ackman was also quick to brush off any concerns about falling occupancy rates at CCA, arguing that the company's aggressive building of new prisons in recent years boosted its total number of beds, and occupancy will rise as those beds are filled. Not to mention that the business is "like a hotel where you lock in the guests, and if they try to escape you shoot them."
Value Investing
Jailhouse Shock
Steve Schaefer, 10.21.09
Forbes
Looking to cash out? Hedge fund manager Bill Ackman sees big bucks in a private prison operator.
William Ackman has built a career on actively investing in companies like Target, pushing for changes to increase shareholder value. But in one of Ackman's latest investments, he's taking a a more passive role, and perhaps for good reason: this company is in the prison business.
At the fifth annual Value Investing Congress on Tuesday at New York's Marriott Marquis, Ackman laid out his case for investing in private prison owner and operator Corrections Corporation of America ( CXW - news - people ).
The U.S. prison system is severely overcrowded -- Ackman cited the statistic that California's prisons are running at 170% capacity -- and with a 12,000 bed inventory, CCA is poised to shoulder some of the load that is overcoming state and federal capacity. Couple that with the fact that it's cheaper and quicker for CCA to build a new facility than it is for the U.S. government, and Ackman says the company's shares are considerably undervalued at their current $25-$26 level, pegging its worth at $40-$54 based on a sum-of-the-parts valuation.
Ackman was also quick to brush off any concerns about falling occupancy rates at CCA, arguing that the company's aggressive building of new prisons in recent years boosted its total number of beds, and occupancy will rise as those beds are filled. Not to mention that the business is "like a hotel where you lock in the guests, and if they try to escape you shoot them."
The board of CCA is also an asset, according to Ackman, and aligned with shareholder interests through their ownership of about 5% of the company's outstanding shares. Coming from a manager whose fund, Pershing Square Capital, is well known for efforts to shake up boards at companies like Target ( TGT - news - people ), that's high praise. At a time when many real estate companies are still bearing heavy debt burdens, CCA has no debt maturing until 2012 and throws off enough free cash to cover those commitments.
The CCA ownership is also part of a pair trade where Pershing is short Realty Income ( OUI - news - people ), which leases retail space. Realty Income does not disclose who its tenants are, but the bulk are discretionary regional retailers and Ackman has some concerns about their credit quality, particularly a few he has identified as junk-rated borrowers with high leverage.
Posted by lois at October 22, 2009 01:01 PM