Michael Burry's Q4 Trade Alerts, Prison Stock Analysis

Legendary investor Michael Burry has invested over $20 million in private prison owner and operator GEO 0.00%↑ and CXW 0.00%↑. Prisons are one of the greatest real estate investment opportunities in today's market. Here is why Burry continues to buy prison stocks.

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First, let's dig into the current valuation of GEO 0.00%↑ . With a share price of $9.51, $GEO has a market cap of $1.1 billion. $GEO also has $2.5 billion of debt and $91 million of cash, giving the company an enterprise value of $3.0 billion. You are buying $GEO for $3 billion.

$3 billion is cheap for a prison. Why? Because of all the real estate $GEO owns. $GEO owns hundreds of prisons in the United States with 56,200 owned beds. These prisons are held on the balance sheet with a historical cost of $2.3 billion. But they are worth much more than that.

The cost to replace and rebuild prisons has only gone up. And with inflation, these costs have continued to increase. Private buyers of prisons value the real estate on a per-bed basis. Prisons sell from anywhere from $100,000 per bed to over $350,000 per bed.

So replacement value is anywhere from $5.6 billion at the low to $20 billion at the high. Even better? $GEO has a near monopoly on these prisons as it is virtually impossible for a new owner and operator to come in and build a new prison from scratch due to regulations.

Secondly, $GEO prints cash. Owning a prison is a great cash business. On average $GEO makes $75 bucks per prisoner per day. Costs per day are only $20 bucks. Even better, contracts with the Federal government are adjusted with inflation. As cost goes up, so do profits.

Despite the great cash flow nature of owning and operating prisons, they have been stagnate with growth. Burdensome regulations and less prisoners in the system have stalled growth. But there is a growth component to $GEO that the market is totally unaware of.

Meet the Electronic Monitoring Segment. The Electronic Monitoring Segment is a tech segment that tracks illegal immigrants, individuals on parole and other individuals through a tether on their ankle or through a smart device.

Here is where it gets interesting. The Electronic Monitoring segment is growing 100% per year with 60% operating margins. In 2022 the Electronic Monitoring segment will generate $250 million of operating income. With a 10x valuation, this segment alone is worth $2.5 billion!

A few issues should be noted. $GEO has a significant amount of debt and banks are refusing to "bank" them these days due to ESG principles. Despite this $GEO recently refinanced its $2.5 billion of debt, albeit at a much higher interest rate.

Interest expenses will be in the ballpark of $200 million per year. Operating income will be around $400 million in 2023, so enough cash to cover the interest expense and build up the balance sheet. I think we see more asset sales in the future to help pay down high-interest debt.

With the refinancing complete, $GEO has a good run-rate to continue to rebuild their business back up, sell assets, deliver and start returning capital back to investors. Every day these prisons get even more valuable from high inflation as the cost to rebuild climbs.

Michael Burry is a legendary investor who called the 2008 housing collapse. But before he became a macroeconomic investor, he was a legendary value investor. $GEO is an incredible value investment trading meaningfully below replacement value.

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