Singing the Mississippi Prison Blues

The cuts were modest: incarceration is pretty much a recession-proof business, unless hard-pressed states start paroling non-violent offenders en masse. But that would make too much sense, and too much trouble with the prison guard unions, so fat chance. California voters have just rejected, 60% to 40%, a fairly moderate and utterly sensible ballot initiative that aimed to divert non-violent offenders accounting for perhaps 10% to 20% of the state's 175,000-strong inmate population into treatment and rehabilitation programs. The measure, financed by George Soros and other out-of-state philanthropists, was blasted by the state's bipartisan political establishment as "the drug dealer's bill of rights," Sen. Dianne Feinstein uttering that vote-winner in a TV ad paid for by the prison guards. Gov. Terminator also sided with a union that fought him on out-of-state prisoner transfers.

In fact, as soon as voters rejected the initiative, prisoner transfers to Mississippi resumed, the state apparently satisfied that its charges will now get proper care from CCA. This ought to be great news for the company, which has managed to whittle its variable expenses per prisoner per day to $9.83 from $9.98 a year ago -- and no need to ask what's in that stew. As a result of such creativity, "operating margin per compensated man-day" improved by nearly 8% in a year's time to $16.90 per shaved head.

And despite the near-term state budget worries, longer-term future continues to look bright as long as the United States, with 5% of the world's population, continues to account for 25% of the Earth's prisoners. The CCA doesn't sound especially worried: "Looking forward to the balance of 2008 and into 2009, we are monitoring the challenges faced by our customers as a result of the downturn in the economy and the unusual financial environment. As most state legislatures are out of session, it is unclear what steps our customers may take to address current and future budget shortfalls. Although this environment increases uncertainty in the short-term, we believe the long-term implications are very positive as states may defer or cancel plans for constructing new state-owned prison bed capacity, which should ensure a continuation of the supply and demand imbalance that has been benefiting the private prison industry."

You'd think the election of a liberal, African-American president might pose a threat, considering that minorities suffer disproportionally from the prevailing lock'em-up mood and mandatory-sentencing posturing that has angered even the normally conservative federal judiciary. But of course President Obama will have a few more pressing issues on his plate, assuming he ever decides to take on the entrenched prison interests. And as Feinstein demonstrates, liberal politicians can love prisons as much as anyone.

So the 14% drop in CCA (ticker CXW) shares certainly seems like an over-reaction to as modest a guidance trim as one could hope for in these hard times. The stock now sells for half its 2007 peak and at a forward price/earnings ratio of 11, below its long-term growth rates. That makes it a bargain, something that can't be said for our criminal-justice system as a whole.