Pubdate: Mon, 11 Dec 2000
Source: Bakersfield Californian (CA)
Copyright: 2000, The Bakersfield Californian.
Contact:  PO Box 440, Bakersfield, CA 93302-0440
Website: http://www.bakersfield.com/
Author: Davin McHenry, Californian staff writer

PRIVATE PRISONS TAKE STOCK MARKET HIT

They were once the hot buy of the stock market, snatched up by thousands of 
investors who had visions of rapid growth and rich profits.

But over the past two years, companies specializing in building and running 
private prisons - including some with operations in Kern County - have 
taken severe hits on the stock market.

"These were once market darlings and now they're outcasts," said James 
Macdonald, a stock analyst for Chicago-based First Analysis Securities.

Stock in private prison companies has plummeted in recent years, in some 
cases by more than 90 percent, at the same time inmate populations have 
grown nationwide and the industry as a whole has been rocked with negative 
publicity, high capital costs and other financial woes.

Nonetheless, the bottom lines at most prison firms appear to be unaffected 
by the lower prices, analysts said.

"The biggest losers are the investors, of course," Macdonald said.

Of the handful of publicly traded prison firms, two have Kern County 
facilities - Corrections Corporation of America and Wackenhut Corrections 
Corporation.

A third firm, Cornell Companies, Inc., also hopes to get a local foothold 
and is currently offering to build a roughly 1,000-bed facility in Arvin 
that would house federal inmates.

All three firms with Kern County ties have seen their stock values drop by 
nearly half in the past year.

Perhaps the most dramatic plunge has occurred with CCA, which is the 
largest private prison firm in the nation with approximately 68,000 beds, 
analysts said. Locally, CCA operates the California City Correctional 
Center, which currently holds more than 500 federal inmates.

Despite its prominence in the industry, CCA's stock has dropped by more 
than 96 percent in the last year alone, falling from more than $8 per share 
in December 1999 to less than 30 cents last week. Just two years ago, CCA 
stock was trading as high as $44 per share.

The crash has come in the wake of a series of highly publicized management 
problems and thanks to the firm's sizable debt - nearly $1 billion - that 
it built up during expansions, analysts said.

"(CCA's) problem has been over-promising by management and over-building," 
Macdonald said.

Locally, CCA spent $100 million to build the California City prison in 1998 
without a contract to house state or federal inmates. The prison is just 
now beginning to receive a full allotment of inmates.

"It's hard to have a $100 million prison not being used for a year," 
Macdonald said.

CCA's woes have also translated into problems for other private prison 
firms, Macdonald added.

"As the industry leader, when they go down, they drag the whole industry 
down," he explained. "(Investors) get worried when the leader isn't doing 
well."

While its recent drops haven't been as severe as CCA's, Wackenhut has also 
seen much better days. Its stock once traded in the mid-$40s but today 
wavers between $6 and $7 a share.

In Kern County, Wackenhut currently operates a trio of small community 
correctional facilities in McFarland as well as the Taft Correctional 
Institution, which houses more than 2,400 low- and minimum-security federal 
inmates.

The Taft facility - constructed in 1995 - was the first federally built 
prison to be turned over to a private firm for operation.

Like many prison firms, much of Wackenhut's woes stem from a rash of 
negative publicity in 1999, including riots and accusations of abuse 
against inmates at its facilities, analysts said.

Those incidents pulled Wackenhut's stock down by nearly 60 percent in 1999, 
from more than $28 per share to under $12 by the beginning of 2000.

Also trading at roughly $12 per share a year ago, Cornell has performed 
even worse as its stock fell to $4 this month - a drop of roughly 66 percent.

Like CCA, Cornell's market performance is hampered by high debts, which it 
has accrued during expansion, Macdonald said.

"The whole industry needs some new financing options," he said.

When a stock loses big, it can create a shortage of willing investors, 
which has its effects, he added. Without the ability to sell new stock, 
firms can find it difficult to raise money for expansions or to pursue 
costly prison bids.

"In the old days, CCA used to be able to go out and sell equity to expand," 
Macdonald said.

Rock-bottom stock prices will also prevent companies from buying up smaller 
firms with stock swaps, he added.

Despite those difficulties, analysts remain optimistic about the future for 
the private prison industry - particularly if the economy begins to slow down.

"This is a counter-cyclical industry, so when the economy gets bad they do 
better," Macdonald said. "Wages go down and, usually, crime starts to go 
up, so they start to earn more and more."

The prison builders themselves are also largely unconcerned about the stock 
price collapse affecting their business, even at troubled CCA. "The company 
will continue business as normal," said CCA spokeswoman Susan Hart. "Our 
facilities haven't seen any impact (from the stock price drops), and they 
won't see any."

In fact, CCA is currently filling its California City prison with roughly 
40 to 80 inmates each week, warden Percy Pitzer said. Eventually the 
facility is expected to house more than 2,300 prisoners as part of a 
10-year, $529 million contract with the federal Bureau of Prisons.

Wackenhut and Cornell are also looking to continue adding new facilities in 
Kern County and nationwide. Both firms are in the process of bidding on a 
contract with the federal Bureau of Prisons that could bring thousands of 
new federal inmates to sites in Arvin or Wasco.
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