Border security continues to be the subject of a heated political debate, and the November election results will probably clarify border control policies and the budget to implement them. For Geo Group (NYSE:GEO), a service provider for ICE processing centers and community re-entry facilities, that clarity will serve as a catalyst for driving the shares higher.
The stock has seen an impressive 83% lift in its share price over the past 12 months, with a 27% rise this year. Despite the surging share price, it trades at a discount to industry peers, making it an attractive option in the Security & Protection Services industry.
GEO Group Overview
The GEO Group is a leading service provider that delivers comprehensive security solutions for various government partners worldwide. The company specializes in constructing state-of-the-art facilities, management services, evidence-based rehabilitation, and post-release reintegration and supervision of individuals within the community.
Since the mid-1980s, the company has maintained a significant public-private partnership with the U.S. federal government. For example, over a third of ICE processing center beds are in a GEO Group facility.
Good news came GEO’s way when, in February 2024, a proposed U.S. Senate Bill aimed to increase the annual funding for alternatives to detention programs, tripling the budget to around $1.3 billion, including an allocation for 50,000 ICE detention beds. However, the bill did not pass.
With that being said, FY2024 federal funding included an allocation for ICE detention to expand to 41,500 beds in the Fiscal year 2024, a significant rise from the previously funded level of 34,000 beds. A post-election revisit of the type of funding in the February bill would probably be a positive catalyst for the GEO Group.
GEO Group’s Recent Financial Results & Future Outlook
GEO Group reported first-quarter revenues of $605.67 million, exceeding consensus expectations for $603.85 million. This represents an increase in revenues by approximately 7% from the previous year, primarily fueled by population increases across the company’s ICE facilities. GAAP net income was roughly $23 million, and adjusted EBITDA was around $118 million. However, GEO Group’s earnings per share of $0.18 fell slightly short of the analysts’ estimations of $0.19.
In early April, the company finalized a new $760 million senior credit facility comprising a $450 million term loan and a $310 million revolving line of credit without any outstanding borrowings at closing. Simultaneously, two senior note offerings were closed, yielding about $1.67 billion in net proceeds. This funding was utilized to refinance about $1.5 billion of pre-existing debt.
In addition, $177 million of 6.50% convertible notes were retired, and the company now has around $53 million in outstanding principal amounts of convertible notes due 2026. This series of transactions reduced the average cost of debt by roughly 1% and pushed debt maturities to 2029 and 2031, with 75% of total debt being fixed rate. The company aims to continue reducing net debt and exploring options to return capital to shareholders under new debt restrictions.
For the second quarter of 2024, management forecasts a GAAP net loss of $27 million to $30 million due to an $86 million pre-tax loss on extinguishing debt during the second quarter. On the other hand, the 2024 second-quarter revenue is expected to be in the range of $600 million to $610 million and adjusted EBITDA in the range of $119 million to $125 million.
Lastly, for 2024, GEO Group predicts a GAAP net income of $55 million to $75 million on annual revenue of around $2.4 billion, slightly below consensus estimates of $2.45B.
Is GEO Stock a Buy?
Geo Group is rated a Strong Buy based on the recommendations and price targets assigned by three analysts over the past three months. The average price target for GEO stock is $17.67, representing an upside of 28.14% from current levels.
Analysts following the company are constructive on the stock. For instance, Wedbush analyst Henry Coffe, a five-star analyst according to Tipranks ratings, recently reiterated an Outperform rating on the shares while lowering the price target from $22 to $20. He noted that Q1 results were modestly below consensus expectations. Still, he anticipates that increased detention beds and ISAP program utilization in the second half of 2024 will drive the stock to higher grounds.
The stock has been on an upward trend, climbing 15.88% in the past 90 days. It trades at the upper end of its 52-week price range of $6.94 – $16.31 and demonstrates positive price momentum over the 100-day (13.17) and 200-day (11.33) moving averages. Shares trade at a discount to historical and peer averages. The EV/EBITDA of 7.47x is trending below the stock 5-year average of 7.84x and the 11.47x average for the Security & Protection Services industry.
Conclusion on GEO
GEO Group has surpassed recent revenue expectations, primarily driven by population increases across its ICE facilities. The company has also taken proactive steps to improve its financial stability, refinancing its debt and reducing the average cost of debt by roughly 1%. While a GAAP net loss is forecasted for Q2, the company anticipates achieving a positive GAAP net income for the full year 2024.
Potential further initiatives are expected to increase ICE detention beds and act as a positive catalyst for the stock. Furthermore, the stock’s positive long-term momentum and attractive valuation make it a target for investors looking for exposure to this long-term theme.
