Trump, Republican sweep is a 'game changer' for private prison industry

A guard escorts an immigrant detainee from his segregation cell back into the general population at a prison managed by GEO Group.
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The Donald Trump-led Republican sweep is nothing short of a game changer for the beleaguered private prison contractor industry.

Prison contractors GEO Group and CoreCivic (formerly known as Corrections Corporation of America) struggled throughout 2016 as federal agencies began showing signs of ending the private management of public correction and detention facilities.

CoreCivic shares are up 57 percent since the election, and GEO shares are up almost 35 percent.

The election outcome provides two apparent benefits to the sector. First, ending government contracts with prison companies is not as much of a political priority for the Trump administration as it has appeared to be under the Obama administration.

Secondly, the new administration's promised hardline stance on immigration could even prove to be a source of growth for both firms. Immigration and Customs Enforcement use prison companies to manage detention facilities.

Analysts think Trump's choice for attorney general bodes well for both stocks.

"We believe that President-elect Trump offering the position of attorney general to Senator Jeff Sessions could be good for CXW and GEO since he has a tough stance on immigration and sentencing reform," said Tobey Sommer, a SunTrust analyst, in a research note last week.

Sommer has noted that federal business represented 51 percent of sales at CXW and 47 percent at GEO in the third quarter of 2016.

"The Trump victory was a game changer for these stocks," wrote Canaccord analyst Paul Morgan in a research note sent Monday. "Not only does the risk to current cash flows seem to have dissolved, but the opportunity to gain new contracts, particularly via ICE, is strong as well. We see upside to both GEO and CXW."

Prison stocks had been under severe pressure over the last several months, perhaps most notably after the Department of Justice instructed the Bureau of Prisons to begin phasing out the use of private contractors for detention facilities. Soon after that, the Department of Homeland Security told Immigration and Customs Enforcement to investigate ICE's own use of contractors for detaining immigrants.

Negative sentiment appeared to climax after the first presidential debate, when candidate Hillary Clinton said she supported ending the use of private companies for public prison management.

Days after the debate, both stocks logged their worst quarterly losses in at least 15 years.

For much of that time prior to the election, analysts maintained that removing even some federal facilities from private management would be easier said than done given the lack of public facilities run by both the Bureau of Prisons and ICE, and the lower risk to contracts with states and the U.S. Marshals.

Canaccord analyst Ryan Meliker said in a Nov. 11 research note that outlook still assumes the Bureau of Prisons will continue to not renew prison contracts as they expire.

However, the new attorney general could reverse or delay the phasing out of contracts for Bureau of Prison facilities. Further, the cancellation of Bureau contracts "were dependent on continued declines in BOP populations, something that may no longer materialize."

Immigration and Customs enforcement "does not have its own facilities and is essentially dependent on the private sector to fulfill its mission, in our view," writes analyst SunTrust's Sommer. In fact, Attorney General Jeh Johnson recently authorized ICE to acquire more detention facility space, as its current capacity is stretched by surges in Central Americans crossing the border to seek asylum from gang violence in their own countries.