Continued Profits Are a Lock for This Industry

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Interesting data from your federal government:

The average wage of the 15.2 million employees in California, according to the U.S. Bureau of Labor Statistics, is $48,090. That's about $23.12 an hour.

Very low on the scale: Private security guards, at $25,950. Also bailiffs, who earn just under $49,000.

Yet relatively high on the scale is state prison guards, who can, with overtime, easily earn more than $100,000 a year. By contrast, a kindergarten teacher in the Golden State can expect to pull down an average $56,540.

If that makes you crazy, try this statistic on for size: Fully 9.5% of the California state budget is allocated toward prisons. Only 5.7%, by comparison, goes to universities.

Twenty-five years ago, prisons were 4% of the budget. Higher education represented 11% of the state budget.

The prison guards union has historically been one of the most powerful in the state. No one pays guards more. And these jobs are very secure: If Sacramento is facing the squeeze and has to furlough state workers, prison guards are one of the few groups that are exempt and must stay on the job.

Wages are only the tip of the compensation iceberg: Guards also receive generous health care and retirement benefits. You won't get 90% of your salary in retirement. A prison guard in California, however, absolutely will.

The Governator is not happy with this.

His administration has been plagued by budget crises. The current budget proposal creates a $20 billion deficit , which half of Californians -- according to a poll released today -- say should come not from more taxes but from spending cuts.

(The half that doesn't think that way were among those who sued the governor for exercising his line-item veto last year. The courts ruled on Tuesday that he had the authority to reduce or eliminate state programs.)

Mr. Schwarzenegger is sponsoring a ballot initiative that would automatically give more money to higher education than to prisons. He has also said he wants to build jails in Mexico to house the 20,000 or so illegal immigrants in California prisons. That suggestion, however, raises constitutional questions and is unlikely to gain traction as a serious solution.

What's left?

Well, the governor could let people out of jail. The politics of this are dicey, as anyone who remembers Willie Horton can attest.

There are other practical considerations as well. In some cases, release isn't even an option. California has a "three strikes" law. Since 1994, three felony convictions have put offenders in jail for the rest of their lives, with scant chances for parole. The law, upheld by the Supreme Court, is wildly popular. After 15 years, one study suggested it has saved the state $54 billion and prevented 10,000 murders.

I'll give you three guesses which lobby pushed that bill through the statehouse.

If you said "the California Correctional Peace Officers Association," you're right.

Mr. Schwarzenegger's only serious alternative is to find a cheaper solution than putting these inmates in prisons with platinum-paid guards. The governor can outsource the problem to companies with lower costs. Private prison operators pay security guard wages rather than correctional officer wages, which gives them a significant pricing advantage. (Wages represent 70% of a prison's budget.)

What's more, private business is far more adroit at building prisons than the slow ship of state can, especially during a financial crisis. And while there is some question as to whether it's kosher to ship inmates to Mexico, it's perfectly all right to ship them to another state.

All that is why 25 U.S. states have deals to outsource prisoners.

The leading vendor is Correctional Corporation of America ( CXW ) , a $2.4 billion company that operates 65 private prison facilities with 87,000 beds in 19 states and the District of Columbia.

Corrections revenue, not surprisingly, has not decreased since 2005. And the future looks bright for the company, not just because of the problems of Mr. Schwarzenegger, but because of the long-term trend toward harsher incarceration in this country. In 1980, 319,598 people were in prison. At the end of 2008, the latest year for which the Department of Justice has data, the total U.S. prison population stood at 1.5 million, a gain of +375%, exceeding the growth in the general population -- +32.4% -- more than tenfold.

The bottom line is that Corrections can't build prisons fast enough, and it will never run out of supply. Even given its status as the No. 1 operator of private prisons, its bed count is equal to a mere 5.7% of the total inmate population.

Given this immense growth potential, CXW is exceedingly cheap. Shares trade for a mere 15.5 times earnings, a significant discount to its historical average earnings multiple of 18.5 and a -13.9% discount to the broader market.

Low costs, strong margins and an endless supply of "customers" is as good as business models get. As governments, like Mr. Schwarzenegger's, seek to find ways to reduce spending, CXW's services will look very appealing. If his ballot initiative wins passage, the state will have no choice but to outsource massive amounts of prisoners.

These government actions are very good news for the company's shareholders -- and very good reasons to become one today.

Government actions mean big money. If you're looking for a steady stream of government-driven profit opportunities like CXW, I invite you to test-drive my premium investing ideas.


Andy Obermueller
Editor: Government-Driven Investing

Disclosure: Andy Obermueller does not own shares of any security mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Stocks

Referenced Stocks: CXW

Andy Obermueller

Andy Obermueller

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