Real estate investment trust The GEO Group, Inc. (GEO), which is based in Boca Raton, Florida, develops and finances secure facilities, processing centers, and illegal immigration detention centers in the United States, the United Kingdom, Australia, and South Africa. The company’s long-term real estate contracts, which entail essential government services, have helped the company grow across all its diversified business units. However, an executive order signed by President Biden in January resulted in non-renewal of some of GEO’s contracts related to criminal detention facilities.

GEO’s shares have declined 16.6% year-to-date and 39.4% over the past year. But the stock has gained 32.7% over the past month, with retail traders betting on the stock heavily because it is being discussed on subreddit r/wallstreetbets as a potential short-squeeze candidate. More than 35.7% of GEO’s float has been sold short.

While the activation of three of its ICE Annex facilities in California and its Eagle Pass Detention Facility in Texas could help it to normalize its operations, the non-renewal of  federal contracts and a heavy debt load could make things difficult for GEO.

So, here is what we think could influence GEO’s performance in the coming months:

Business Headwinds

Earlier this year, the Biden administration signed an executive order for the non-renewal of  U.S. Department of Justice (DOJ) contracts with the private criminal detention facilities operated by GEO. During the first quarter of 2021, the U.S. Marshals Service (USMS) notified GEO of the non-renewal of contract for the company’s Queens Detention Facility in New York, which ended on March 31, 2021. Since the agreements with the USMS accounted for nearly 15% of GEO’s revenues, this non-renewal could negatively impact its performance.

Mixed Growth Potential

A $2.25 billion consensus revenue estimate for its fiscal year 2021 represents a 4.3% decline year-over-year. The company’s revenue is expected to decrease 4.2% from the prior-year quarter to $2.15 billion next year. Analysts expect GEO’s EPS to rise 2.5% in the current year and 33.3% next year. However, its EPS is expected to decline 25% in the next quarter ending September 2021. GEO has an impressive earnings surprise history. The stock has beaten the consensus EPS estimates in three of the trailing four quarters.

Mixed Financials

GEO’s revenue declined 4.7% year-over-year to $576.38 million for the first quarter ended March 31, 2021. Its operating income increased 16.9% year-over-year to $65.63 million, while net income surged 100.9% from the prior-year quarter to $50.48 million. Its EPS came in at $0.41, representing a 95.2% increase year-over-year. As of March 31, 2021, GEO’s long-term debt stood at $2.49 billion, while non-recourse debt stood at $317.60 million.

The company’s 24.8% trailing-12-month gross profit margin is 61.9% lower than the 65.1% industry average. GEO’s ROE and ROA of 14.4% and 3.1%, respectively, are 408.8% and 101.4% higher than their  industry averages.

Consensus Price Target Indicates Potential Upside

Of the two Wall Street analysts that have provided ratings for the stock, one rated it Buy and one rated it Hold. Currently trading at $7.26, analysts expect the stock to hit $12.33 in the near term, indicating a 69.8% potential upside. Their price targets range from a low of $7 to a high of $15.

POWR Ratings Reflect Uncertainty

GEO has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. GEO has a C grade for Quality. This is in sync with the stock’s lower-than-industry gross profit margin.

In terms of Value Grade, GEO has a B. The company’s 7.24 non-GAAP P/E ratio, which is 86.1% lower than the 52.21 industry average, is consistent with its  Value grade.

However, the company has a C Momentum grade, which is  reflective of its price returns year-to-date.

In addition to the grades we’ve highlighted, one can check out additional GEO ratings for Sentiment, Growth, and Stability here. GEO is ranked #25 of 53 stocks in the D-rated REITS – Diversified industry.

Click here to view the top-rated stocks in the REITS – Diversified industry.

Bottom Line

While the latest meme-stock frenzy has been driving up the shares of GEO, the government’s decision to sever ties with the private prison operator could cause the stock’s price to decline in the near term. In addition, GEO is carrying a heavy debt load. So, we think investors should wait for its business and financials to stabilize before investing in the stock.

GEO shares rose $0.16 (+2.20%) in premarket trading Thursday. Year-to-date, GEO has declined -13.88%, versus a 14.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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