By M. Marin
READ THE FULL CXW RESEARCH REPORT
Asset sales de-risk CXW fixed asset ICE exposure
CoreCivic (NYSE: CXW) completed the sale of two facilities to government partners earlier this month for aggregate expected after-tax net proceeds of roughly $1.1 billion. The company expects to continue to manage both facilities under existing contracts with ICE. We view it positively that CXW has monetized two assets with little to no expected impact on cash flow.
The asset sales de-risk CXW’s exposure to ICE somewhat, which we also view positively. Following the transactions, 20% of the company’s owned beds are under contract to ICE, down from 25% before. CXW is also engaged in discussions with ICE about potential sales of additional facilities. CXW facilities are purpose-built for the needs of ICE and other government entities. CXW facilities generally are modern and designed to provide services that could make them a turnkey solution for government agencies. It would not surprise us if CXW’s Prairie Correctional Facility were being considered under this model.
Balance sheet stronger
CXW has substantial liquidity to support operations, buybacks and growth measures, in our view. The company’s 2.8x TTM Debt leverage ratio is at the low end of its target range, and CXW generates strong cash flow. Reflecting the company’s operating leverage, business momentum and renewal rate on its facilities over the past five years (CXW has a 96.4% 5-year retention rate), among other factors, we are optimistic about CXW’s opportunity to continue generating stable cash flow.
Moreover, we view CXW’s diversification efforts now, while its book of existing and potential business is robust, as a positive aimed at enabling future growth opportunities. The company expects to use a portion of net proceeds to reduce debt and, pro forma for the sales, will have no major debt maturities before 2029. The transaction enhances CXW’s balance sheet flexibility, freeing capital for allocation to other measures designed to enhance shareholder value and flexibility to repurchase shares. Remaining net proceeds are earmarked for general corporate purposes, including potential tuck-ins.
Believe asset sales support measures to generate growth, shareholder value
Enabling CXW to make additional tuck-in acquisitions in adjacent service sectors is another positive, in our view, as CXW did recently when it acquired Clinical Solutions Pharmacy (CSP). CSP is one of the largest domestic providers of mail-order pharmacy services to correctional facilities. CSP serves 600+ correctional facilities across 28 states, including CXW’s. The acquisition helps diversify CXW’s revenue and cash flows into an adjacent business that management believes has significant runway to grow by adding new customers, including those that currently provide these services in-house, and potentially consolidating the business niche, combined with the anticipated growth of aging prison populations. Moreover, CXW expects that its ability to provide a broader array of services to its government customers can enhance its opportunities and potentially create cross-selling opportunities. CSP has strong customer relationships, according to CXW.
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