Shares of a two publicly traded prison operators lost nearly half of their value on Thursday after a report said the Justice Department would end use of private prisons.
Investors punished the stocks of two prison real estate investment trusts, Corrections Corporation of America (CXW) and GEO Group (GEO), with both stocks down more than 46%, after The Washington Post reported that a memo indicated officials had been told to either not renew contracts with prison operators or even diminish existing deals.
Corrections Corporation of America says it is the largest owner of privatized correctional and detention facilities and one of the largest prison operators in the U.S., owning or controlling 66 facilities and an additional 11 facilities owned by government partners—with a total capacity of 88,500 beds in 20 states and D.C. GEO Group, meanwhile, says it is the sixth largest correctional system in the U.S. by number of bed.
Both are highly exposed to their business ties with the federal government, which if the Washington Post story is accurate, would be greatly threatened. Corrections Corp. says 51% of revenue last year came from federal correctional and detention authorities, while GEO Group says it gets 45% of revenue from the federal government.
Revenue at both companies had steadily increased over the years, as managing private prisons is a lucrative business. GEO Group’s top line increased from $1.52 billion in 2013 to $1.84 billion last year. Corrections Corp.’s jumped from $1.69 billion to $1.79 billion over the same period.
Generally, private prisons have sold their business as a way for the federal government and other agencies to save money on the cost of keeping prisoners in jail. The practice, however, is highly controversial—it was even a key theme in the most recent seasons of the popular Netflix prison show Orange is the New Black.
Data is divided on if private prisons actually save governments money. The New York Times several years ago said a study in Arizona found that private prisons either cost as much or even slightly more than state-run prisons. Mother Jones more recently said a Mississippi study found private prisons actually costs more, because they were more likely to hold inmates for longer periods of time by lengthening their sentences due to infractions that occurred while the prisoners were in jail.
