Zacks Small Cap Research – CXW: Revising Estimates; Believe CXW Relationship with ICE Remains Strong – Technologist

By M. Marin

NYSE:CXW

READ THE FULL CXW RESEARCH REPORT

Believe contract termination does not reflect any change to CXW’s strong relationship with ICE…

CoreCivic (NYSE:CXW) received termination notice from ICE earlier this week that ICE plans to terminate services at the South Texas Family Residential Center in Dilley, Texas effective in 60 days (~August 9, 2024). While we see this as a short-term challenge for CXW in terms of the loss of occupancy, we believe the contract termination does not reflect on the company’s relationship with ICE, its largest customer. We expect further renewals, extensions and new business agreements for CXW with ICE in the future.

Management has indicated that the decision to terminate the contract primarily reflects the high cost of operating the facility, which unlike the majority of CXW’s ICE contracts, has been operated under a costlier Family Residential Standards (FRS) model because the facility was initially designed to house families seeking asylum. Specifically, the company originally entered into the contract in 2014 as ICE sought to provide solutions for the high volume of families seeking to enter the U.S. at the time. However, subsequently in 2021, the facility transitioned primarily to detention of single adults. The population at the center was 1,561 as of June 9, 2024.

Revenue at the center was $156.6 million in 2023 and $39.3 million in 1Q24. The company expects the annualized EPS impact to be a reduction of about $0.38 to $0.41. Given that the termination becomes effective in August 2024, we estimate the 2024 impact will be about $0.15 to $0.16 per share. We have revised our model to reflect the expected impact.

Expect CXW will largely offset impact over time; Believe recent ICE RFI could present opportunity…

We expect CXW will largely offset the anticipated impact of the contract termination over time, but it could take a while. Thus although the contract termination presents a short-term challenge for CXW, as noted, longer term we believe it could lead to rising demand from ICE under the traditional detention model, depending on budgets and potential political factors. If so, we would expect CXW to garner a rising number of contracted beds with ICE over time.

In fact, last month ICE and Homeland Security (DHS) issued an RFI (Request for Information) to “identify possible detention facilities to house non-citizens in support of its public safety mission.” Specifically, ICE is seeking detention capacity in the Chicago, Harlingen, Texas and Salt Lake City markets. CXW’s Midwest Regional Reception Center, which is located in Leavenworth, Kansas, has capacity and potentially could represent a well-positioned solution.

Moreover, we also expect that the company is in discussions with ICE to explore other solutions for the capacity that is housed at the South Texas Family Residential Center, including potentially transitioning from the above-noted costlier FRS model to the more traditional model.

Capital allocation expected to prioritize leverage reduction…

Separately, CXW’s leverage ratio reached 2.7x by the end of 1Q24, placing it within the target range of 2.25x to 2.75x. With no major debt maturities before 2029 as illustrated below other than some $262 million maturing in 2027 (which carry a 4.75% stated interest rate and therefore we do not expect the company to refinance in advance), CXW purchased 2.7 million shares in 1Q24. This was more than it repurchased in all of 2023. However, in the short-term, the leverage ratio is expected to change reflecting the expected reduction in EBITDA from the South Texas Family Residential Center. As a result, CXW has indicated the likelihood that it will prioritize debt reductions rather than share buybacks in the near-term.

Moreover, management has indicated that the prospective pipeline is robust …

The company is engaged in multiple discussions with existing and potential partners that have rising demand for capacity and reflecting its own efficiency improvements. At the same time, renewal rates remain high, reflecting the limited supply of and older state of many government owned correctional facilities (as noted with the state of California).

SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR. 

DISCLOSURE: Zacks SCR has received compensation from the issuer directly, from an investment manager, or from an investor relations consulting firm, engaged by the issuer, for providing research coverage for a period of no less than one year. Research articles, as seen here, are part of the service Zacks SCR provides and Zacks SCR receives quarterly payments totaling a maximum fee of up to $40,000 annually for these services provided to or regarding the issuer. Full Disclaimer HERE.