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Stock screeners are tools that let investors filter through a large number of stocks according to chosen criteria. It is important to remember that a stock screener is just a tool and every investment should be analyzed on its own merits to make sure it fits with your personal portfolio and risk characteristics. My weekly column finds interesting investment opportunities with the help of our Stock Screener.

To be honest, I decided on this stock screener quite by chance. I originally had my mind set on the Cosmetic & Skin Care industry for this week, but just above it was the Correctional Institutions industry. When prison management companies first became public I was so repulsed by the idea that I never followed up on them. Now, some ten years later, and after their performance the past year, I decided to take another look.

The four companies in the industry (in order of market capitalization) are Corrections Corporations of America (NYSE: CXW) with a $3.39 billion market cap, The Geo Group, Inc. (NYSE: GEO) with a market value of $1.22 billion, Cornell Companies, Inc. (NYSE: CRN) with a $302.52 million market cap and finally, the OTC traded (hence I won't cover it here) Avalon Correctional Services, Inc. (OTC: CITY).

Why even bother? Well, look at the year-to-date returns and decide for yourselves (the bottom, yellow line is the S&P 500), the rest, going up, are Cornell, CCA and Geo.

Better yet, one year returns are 54% for Cornell, 91% for CCA and 115% for Geo. So the question is -- have they run out of room to grow?
Industry

First, a few words about the industry. While private correction facility management isn't a new concept, it is a fairly young business as most companies have been operating for about two decades. With reliance on government contracting and physical assets, as well as labor issues, the barrier to entry is quite high. In addition to dealing with government bureaucracy, correction facility management companies had to deal with activists who oppose the concept of privatization altogether.

The key factors in the industry, however, are the severe shortage of prison space and the climbing prison population. According to Pew Charitable Trusts, the prison population will grow 13% by 2011, and construction of new prison beds will cost as much as $12.5 billion, probably causing states and the federal government to outsource even more as the private sector can build at a much lower cost.

The prison industry, however, has long cycles and investors should mind this carefully. Right now, the industry seems poised for a growth period.

Correction Corp.:

In the company's own words, it "specializes in the design, building and management of prisons, jails and detention facilities and providing inmate residential and prisoner transportation services in partnership with government." Behind the federal government and three states, CCA is the fifth largest corrections system in the U.S. with approximately 72,500 beds in 65 facilities in 19 states and the District of Columbia. It manages approximately 70,000 male, female and juvenile inmates at all security levels.

Recent news:
- On Feb 8, CCA announced that it expects first quarter 2007 diluted earnings per share to be in the range of $0.43-0.47, and fiscal 2007 EPS to be in the range of $1.95-2.05, in-line with Reuters analysts estimates of $0.43 for first quarter 2007 and EPS of $1.95 for fiscal 2007.
- Last week, the director of CCA sold 22,500 shares for $53.58 apiece under a prearranged trading plan.
- CCA will release its first quarter 2007 financial results on Thursday, May 3, 2007.

The Geo Group:

Geo Group is the second largest provider of privatized diversified services to government agencies around the globe. Geo designs, constructs, finances and manages jails, state and federal prisons, special-purpose institutions, and immigration and detention centers, and also develops and manages medical and mental health rehabilitation facilities and services. Geo currently provides services in the United States, Cuba, Australia, South Africa, the United Kingdom and Canada, managing 62 facilities with a total design capacity of of 54,995 beds for men, women and juveniles.

Recent News:
- Yesterday, Geo received a five-year contract to develop and operate a 1,500-bed detention facility in Texas that it expects will generate $36 million in annual operating revenue. The contract includes three five-year renewal option periods that could lengthen the total contract to 20 years. The facility is scheduled to open in the fourth quarter of 2008.
- Last week, the State of Mississippi approved a 500-bed expansion of the 1,000-bed East Mississippi prison operated by Geo. The expansion should take place in the fourth quarter of 2008 and generate $5-7 million in extra annual revenue.
- At the end of last month, Lehman Brothers upgraded Geo to Overweight from Equal Weight and raised the price target to $54 per share from $50 based on its recent secondary stock offering of 5.5 million shares, raising net proceeds of $226.3 million. The company said it will use $200 million of that sum to repay debt on its senior secured credit facility. Compared to CCA, Geo is traded at a discount, the analyst said. He also raised his 2007 and 2008 revenue estimates, expecting Geo to increase its patient capacity and improve margins.
- Last month the company reaffirmed Q1 2007 guidance and raised FY 2007 guidance. The revenue guidance range for the first quarter is $215-220 million and EPS range of $0.37-0.39, in-line with Reuters estimates of $0.38 EPS. For fiscal 2007, earnings guidance is now $1.96-2.11 per share and revenue range is $900-920. Reuters estimates call for EPS of $2.05 for fiscal 2007.

Cornell Companies:

Cornell is the smallest of the three and also provides correction, education, rehabilitation and treatment for adults and youth. The company has 82 facilities in 18 states and the District of Columbia with a total service capacity of 19,442. Cornell has three primary business lines: Adult secure, community-based corrections, and youth and families (including alternative education).

Recent news:
- Last week, Cornell announced that it has agreed to acquire GRW's Brush Correctional Facility for women in Brush, Colorado. The facility currently houses approximately 270 medium-security female inmates. The transaction should close during the second quarter of 2007.
- After reporting fourth-quarter and FY 2006 results that beat analyst estimates, Avondale Partners upgraded Cornell from Perform to Outperform, and raised the target price from $20 to $25.
- First-quarter 2007 earnings were guided to range from $0.01 to $0.05 per share, well below analysts estimates of $0.24. For the full year, management expects earnings to range from $0.80 to $0.86 per share, also below Reuters Estimates of $1.11.

Comparisons

Looking at the price-to-earnings ratios, it seems that GEO is the cheapest.
Trailing P/E - CXW: 32x, GEO: 30x, CRN: 24x
Forward P/E (2007 earnings) - CXW: 25x, GEO: 24.6x, CRN: 25.9x
This is especially evident when looking at top-line and bottom-line growth of the three companies. Geo had phenomenal 50%+ growth rates in the past few quarters and triple digit EPS growth. Cornell followed suit with decent growth rates as well when compared to CCA's somewhat lacking growth.
However, when comparing operating margins, CCA has much higher margins compared to its counterparts, especially Geo, and yet, Geo's balance sheet also seems to be more stable.
Analysts expect long-term growth rate of 10% at Cornell, 15.7% at CCA and 19% at Geo.
On average, analysts rate Cornell as a Hold with a target price of $23, Geo as a Buy with $55 target and CCA also as a Buy with $60 target.
Pipeline - CCA has a few expansion plans for several of its facilities for a total of 5,860 beds for 2007-2008. Geo has 5,400 planned beds under developments for 2007-2008.
Occupancy -- CCA reported 96.6% occupancy in Q4, Geo 98.5% and 100.5% for Cornell.
CCA set a 52-week high yesterday, Cornell last week, and at $49.40, Geo is off its 52-week high of $52.30 set in February.

My take

I like Geo's fundamentals and growth story the best. In addition, I also like its Geo Care business, which is showing tremendous growth and could provide a cushion for when the prison cycle goes the other way. I'd prefer it right now over CCA and Cornell, although CCA seems to be a favorite.

I don't know if I'd ever buy a correction facility stock since, in principle, I disagree with the concept and find it almost appalling, but investors who can stomach it may find an interesting growth story here.