Private Prisons & Wall St. Profits
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The United States of America has the highest incarceration rate of any industrialized nation. According to the Bureau of Justice Statistics (BJS), the USA has an incarceration rate of 754 per 100,000 people (as of 2009) this equates to 2,266,832 prisoners from a total population of 310.64 million. The United States makes up just 5% of the global population, but accounts for 25% of the global prison population. The incarceration rate in the U.S. is disproportionately high compared to other countries, but I am not here to discuss the social ramifications of mass imprisonment.
A great company I have been observing is Corrections Corp. of America (NYSE: CXW). This stock has been around since 1983 and closed at $38.13 March 18, 2013. To give you a little history of this company we can go back in time to 1983 when the U.S. government under the Ronald Reagan administration allowed privatization of the prison system.
Picking profitable stocks
The first thing I do when selecting a prospective stock to purchase is to look at the demand for the present product or service. The demand for CXW is viable for present day America. Crime rates are not increasing, but the incarceration rate for non-violent crimes is. According to the Bureau of Justice Statistics (BJS) violent crime has decreased between 1990 and 2011; however, as many as 7 million people are circulated throughout the penal system.
The second thing I check on my list is the future growth and demand for the companies I invest in. As mentioned before violent crime rates have decreased but this has not stopped Corrections Corporation of America (CCA) from lobbying congress to introduce stricter laws for non-violent offenders. CCA was founded in 1983 by Tom Beasley, Doctor Robert Crants, and T. Don Hutto. The reason for the high incarceration rate in the U.S. is unreasonable laws for non-violent crimes, for example marijuana or cocaine found in small quantities on the person, quantities distribution. In order to increase market capitalization the more people imprisoned innocent or not the more workforce is available to produce goods and services that can be sold for high retail prices that were produced by prisoners.
There are currently 37 states in the U.S. where privatization of prison labor for corporate profits is sanctioned. I hypothesize the prison population will increase. The average prison laborer earns $1.00 or less per hour. Cheap labor or low overhead equals high rates of return for products and services. The U.S. prison population will continue to increase, big corporations in the private prison industry simply find the manufacturing of goods and services cheaper than shipping jobs overseas. This is an optimistic outlook for CCA with a current P/E ratio of 24.12 and a 52 week trading range from $24.74 to $39.31
The outlook for the future of CCA is optimistic with more correctional facilities being built for the growing prison population. CCA also designs, manages and operates these private facilities. Growing demand for products and services should translate into ongoing future profits and longevity for CCA.
Prison Slave Labor Joint Ventures
The slave labor of prison work programs is incentive for corporate stakeholders to lobby for longer prison terms and higher incarceration rates for non-violent crimes. I thought slavery was over, but once again I have been corrected. Wall St. is behind the growing incarceration rate in U.S. prisons and their direct influence in lobbying Congress for more draconian laws for non-violent offenders.
Currently 37 states have legalized prison slave labor. Here is a partial list of companies who benefit from prison indentured servitude: IBM, Dell, AT&T, Compaq, Hewlett-Packard, Revlon, Nortel, Unicor, Victoria Secret and Boeing. Forget China, the United States has now become a great place to invest for cheap goods due to the massive prison population. Investors can now get cheap labor from pennies per hour up to $1.50 per hour.
With inmates working for next to nothing the U.S. should be out of its recession in record time. Boeing (NYSE: BA) previous close was $85.18 for March 18, 2013. Boeing owns MicroJet, a wholly owned front company that manufacturers airplane parts in the private prison system. Boeing paid prisoners from less than $1 per hour up to $7 per hour compared to the more than $30 per hour for a qualified machinist. This decision does not give me confidence in traveling overseas on airplanes with parts manufactured by disgruntled inmates. Inmates do not take pride in their work, especially working for pennies on the dollar.
Boeing is a great stock purchase as far as I am concerned. Revenue has steadily increased from $64.31 Billion in 2010 to $81.70 Billion in 2012. The average Boeing machinist earns $32 per hour. Hiring inmates under MicroJet to do the same job as a qualified machinist for pennies on the dollar results in future earnings per share increasing steadily. Previous earnings per share increased from $4.49 in 2010 to $5.16 in 2012.
The future looks bright for Boeing who signed an order for 175 single aisle 737s for the European low cost airliner Ryanair. This deal is worth $15.6 Billion.
Robert Palmer has no position in any stocks mentioned. The Motley Fool recommends Corrections of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!