NEW YORK (Reuters) – The weakening U.S. economy has unleashedlayoffs, reduced profits and sucked value from the stock market, butsome companies, such as those that run prisons and consult forgovernment, can benefit from harsh economic times.
When state and local budgets see shortfalls, cash-strappedgovernments hire companies like management consultant Maximus Inc, social services provider Providence Service Corp and prison company Corrections Corp of America, according to analysts.
Government belt-tightening could be a boon for a range of mid- andsmall-cap names whose share prices have in many cases fallen as far asmore cyclical companies that really do suffer in a downturn. And,analysts say, that could present some stock market opportunities.
The housing slump has hurt public budgets, as depressed propertyvalues and lowered homeowners’ equity cut proceeds from real estate andsales taxes.
In 2009, 25 states are facing shortfalls, according to the Center onBudget and Policy Priorities. That pain trickles down to localgovernments, which increasingly look to privatize services theytraditionally have performed.
By outsourcing a prison, states can save as much as a quarter of itscost, Avondale Partners analyst Kevin Campbell said, which is whyprivate prison companies boosted their market share to 7.2 percent in2006 from 6.5 percent in 2001-2003.
States might begin a new wave of prison privatization sooner than inthe 2001 recession because the United States is still suffering fromprison overcrowding as a result of that last downturn, Campbell said.
SHARES DOWN
Yet shares of Corrections Corp, the United States’ largest prisoncompany, are down about 20 percent from their 52-week high of $33.25.
The story is similar with other prison companies. The Geo Group is down about 19.7 percent from its 12-month high of $32.89 and Cornell Companies is off about 24 percent from a high of $27.76.
"You would expect them to outperform given their defensive nature," Campbell said.
Corrections Corp and Geo’s share prices are "compelling" in partbecause they will reap business from California’s prison bed shortage,estimated at 60,000 beds or more, Lehman Brothers analyst JeffreyKessler said.
California’s projected 2009 budget shortfall, at $14.5 billion, isby far the country’s biggest, according to the Center on Budget andPolicy Priorities.
Kessler anticipates strong 2009 earnings for both Corrections Corp and Geo.
A recession could also cause a spike in crime, resulting in afurther increase in demand for prison beds, Kessler said. "This wouldput further wind at the back of the private prison companies."
Companies such as Tyler Technologies Inc,a provider of software to local government, resist recessions well,said Eric Marshall, who follows government services for the HodgesSmall Cap Fund.
Tyler’s stock is down about 14 percent for the year, but hasoutperformed the Russell 2000 .RUT, down about 18 percent for the year.
RECESSION-RESISTANT
The company is recession-resistant because it is "tied to the needto process parking tickets and utility bills and those things are goingto happen no matter what," Marshall said.
Of course, downturns make local governments even hungrier to collect that revenue efficiently.
The same dynamic supports Maximus Inc,a management consultant to government, whose shares are down about 23percent from their year high of $48.33, partly because of a failedattempt to sell itself, said Jeffries & Company analyst MatthewMcKay.
Maximus has grown revenue in every downturn and expects a repeatperformance because the company’s emphasis on efficiency appeals intight times, Chief Executive Richard Montoni said during a recentconference call.
Maximus is set for a surprisingly strong showing in 2008, saidMcKay, who has a "buy" rating on the stock and a one-year price targetof $55.
Likewise, Medicaid administrator Providence Service Corp is tradingat $28.57, but Sidoti & Co. analyst Greg Williams’ 12-month pricetarget for the shares is $37. He said he rates them a buy in partbecause they’re a "counter-cyclical play."
In 2008, California accounts for almost 18 percent of Providence’s$310 million Medicaid administration business, a direct result of thestate’s budget woes, Chief Executive Fletcher Jay McCusker told Reuters.
"A recession drives clients to our business," said McCusker, addingthat Providence picked up new business in Florida, Virginia, Maine,Illinois and Nevada during the 2001 recession. "We anticipate nodecrease in business even though state budgets may be flattening.
(By Helen Chernikoff – Analysis; Editing by Brian Moss)
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