CoreCivic: Shifting Away From The Bonds And To The Shares (NYSE:CXW)

CoreCivic (NYSE:CXW) shares rallied last week after the owner of correctional facilities posted a better than expected earnings report. The company’s earnings allowed me to update the bullish thesis I wrote on the company’s debt in the fourth quarter. I believe that CoreCivic shares now represent the best value play for investors.

CoreCivic’s fourth quarter earnings per share and revenue were better than expected. The company spent 2022 undergoing a transformation by selling certain assets that were not strategically important and dealing with the new regulations in detention presented by COVID-19. Revenue declined slightly year over year but was near flat when comparing the fourth quarter results from the prior year. Safety costs, which is mostly comprised of personnel jumped year over year as management had to navigate the difficulties of the labor market, but in the earnings call, it was indicated that the labor constraints had started to show signs of improvement.

CoreCivic’s balance sheet also showed improvement in 2022, mainly in the managing of its debt. The company’s overall debt (long term and current combined) decreased from over $1.5 billion to $1.25 billion during the calendar year. Two thirds of the debt reduction were funded by cash as the company’s cash balance was cut in half from $300 million to $150 million. Nevertheless, the company’s conservative fiscal approach led to an increase in shareholder equity by $60 million.

In the company’s earnings release, management released earnings guidance for the calendar year 2023. The company expects EBITDA of $298 to $313 million, which on the surface seems like a steep decline from 2022. But the company had an $87 million gain on the sale of assets in 2022, which led to an adjusted EBITDA in 2022 within the guidance range of 2023. Essentially, management is projecting no earnings growth for the next year. Through the difficulty of the last two years, CoreCivic has still managed to beat on four of the last eight earnings reports.

CoreCivic’s activities after year end show that it is further committed to shoring up its balance sheet. Earlier this month, the company paid off the remaining $154 million in outstanding bonds due in May. On the earnings call, it was revealed that the payoff comprised of cash and a $35 million draw from the company’s revolving credit facility. This move reduced CoreCivic’s interest bearing liabilities by $119 million, while the company presumably has over $750 million in liquidity with the credit facility having a capacity of $800 million. The reduction in interest expense was not reflected in management’s guidance.

What makes CoreCivic a good value stock candidate lies in its valuation relative to its peers. Based on Seeking Alpha’s peer comparison, CoreCivic is trading the cheapest amongst its peers at eleven times earnings, implying an earnings yield of 9%. This is half of the valuation of Geo Group. Furthermore, CoreCivic is trading at just 92% of its book value, also the lowest of its peers. Investors are getting more for their dollar by investing in CoreCivic shares versus its peers.

It’s important to note that I am shifting away from encouraging the company’s debt to its shares. Since my last article, the company’s debt has rallied to yield around 7%. While the bonds are appropriately priced compared to their benchmark rate, their recent rally has created a spread between the earnings yield of the stock and the yield of their debt.

CoreCivic is currently earning 9% of its market value in a tough environment. Management is making a concerted effort to reduce leverage, control costs, and increase value for shareholders. With the possibility of COVID restrictions lifting later this year, CoreCivic could get the albatross that has caused so many operating challenges off of its neck, and resume earnings growth.