Crime Pays

The company: Houston-based Cornell Corrections Inc. is profiting from an enterprise many would deem criminal--building and operating prisons. Cornell builds and manages adult correctional facilities; it also provides an array of facilities for troubled youth.

The markets: Privately managed prisons are growing in popularity among local, state and federal agencies. According to Cornell, from 1990 to 1996, the number of beds in privately managed facilities grew at a rate of 34 percent to reach 85,201. This occurred during a time when the prison population overall was growing by only about 7.8 percent a year, reaching 1.6 million in 1996. Privately managed beds now account for nearly 5.2 percent of all prison beds.

The sizzle: The government's desire to cut costs is driving this trend. Instead of adding hugely expensive prisons to already stretched spending packages, state governments are choosing more and more to contract jobs out to private companies. In turn, companies like Cornell build the prisons, turning a profit even when charging government agencies less to build the prisons than it would cost to do it themselves.

The risks: Managing prisons is not as predictable as managing fast-food restaurants. Take the trouble that Sarasota, Florida-based Esmor Corrections (now known as Correctional Services Corp.) had in 1995. Detainees at an Elizabeth, New Jersey, Immigration and Naturalization Service facility they were running rioted, causing quite a scandal for the company and hurting its ability to get new contracts. Although the company changed its name, its stock has never recovered. Any prison manager--Cornell included--runs this risk. Given that much of Cornell's business comes from only two customers--58 percent was with the Federal Bureau of Prisons and the California Department of Corrections in 1996--this risk could be even more pronounced.

Historical financial performance: From 1992 to 1996, Cornell's revenues grew 88.9 percent--well above the growth rate of other privately managed facilities in the industry. Last September, that growth got a significant boost when the company acquired the assets of Abraxas Group, a Pittsburgh-based nonprofit provider of juvenile programs. Not only did Abraxas get Cornell into a faster-growing segment of the correctionals universe--kids--but it almost doubled the company's revenue base.

Projected financial performance: Cornell's revenue growth is beginning to show on its bottom line, in the form of net profit. From January to June last year, the company earned $.18 per share vs. a loss of $.20 per share during the first six months of 1996. Estimates for 1997 are $0.44 per share, while estimates for this year are $0.61 per share, for heady annual growth of 39 percent. Given that Cornell trades at only 21 times trailing operating earnings, the company seems poised to see its share price rise over the next few years.

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The Motley Fool can be found on the Web at http://www.fool.com and on AOL at keyword: FOOL. Randy Befumo contributed to this article. The above opinions are those of the authors and not of Entrepreneur. Past performance is no guarantee of future results.

The Outlook

Past and projected sales and earnings.

1995
Revenues ($M): $20.6
Net income ($M): $1.0
Earnings per share: $0.25

1996
Revenues ($M): $32.3
Net income ($M): $ 2.4
Earnings per share: $ 0.53

1997*
Revenues ($M): $69.9
Net income ($M): $3.2
Earnings per share: $0.44

1998*
Revenues ($M): $112.6
Net income ($M): $5.9
Earnings per share: $0.61

*estimated figures are as of December 9, 1997

At A Glance

Name: Cornell Corrections Inc.
Recent price: $16 ¾
Price/earnings ratio: 44
Market: American Stock Exchange
Symbol: CRN
*Figures are as of December 9, 1997