According to the most recent 13F holdings report, Michael Burry from Scion Asset Management sold his entire portfolio. Burry is a bearish investor overall but has decided to remain bullish on only one stock, The GEO Group, Inc.
The investor in “Big Short”, Burry, seems to hint that one of the largest prison owners may be a great hedge against inflation and recession. Let’s find out why.
About Geo Group
Founded in 1984, the GEO Group, Inc. (GEO) is one of the leading government service providers that focuses on the rehabilitation industry. It owns and operates prisons, jails, and community corrections centers across the United States, Australia, South Africa, and the United Kingdom. In addition, GEO Group provides diversified services driven by evidence-based rehabilitation programs for in-custody individuals that extend through their post-release into the community as well. Its operations cover approximately 83,000 beds spread over 103 secure facilities, processing centers, and community reentry centers.
Shares of the private prison operator have dropped 1.53% since the beginning of 2022, compared to a 19.61% drop in the S&P500. Analysts are looking forward to a strong quarter amid Moody’s rating upgrade and institutional ownership’s positive view towards the company.
Moody Upgrades GEO Group to B3
Earlier this month, Moody’s upgraded the corporate family rating (CFR) of GEO from Caa2 to B3 with a stable outlook. The rating’s upgrade was driven by GEO’s closing and execution of a distressed debt restructuring transaction, resulting in a reduction of net recourse debt and an extension of near-term maturities. This transaction strengthened the company’s capital structure, balance sheet, and liquidity profile. Moody expects sufficient liquidity will be maintained, allowing GEO to reimburse its short-term obligations.
“The redemption of our remaining 2023 Senior Notes is another important step towards addressing our near-term debt maturities. Along with our recently completed transactions to stagger our debt maturities over a longer period of time, we have now been able to reduce our outstanding debt due prior to 2026 to approximately $170 million. We remain focused on our goal of reducing net recourse debt by $200–250 million annually and decreasing our net leverage to below 3.5 times Adjusted EBITDA by the end of 2023 and to below 3 times Adjusted EBITDA by the end of 2024.”
GEO Chairman George Zoley, Following the redemption of $125.73M, 2023 senior notes
Although the credit rating agency noted a high governance risk due to exposure to refinancing risk, the higher-than-expected participation in recent exchange transactions can partially offset this risk. Still, another rating upgrade is unlikely to happen over the medium term unless the industry’s outlook improves drastically or sustained growth is demonstrated over the next few quarters.
GEO, the only stock for Michael Burry
Michael Burry is a hedge fund manager known for his timely positions that generated massive returns. He was one of the very few to bet against the US subprime market which triggered the global financial crisis in late 2008. His hedge fund, Scion Asset Management LLC, invested in several large stocks such as Bristol-Myers Squibb (BMY), Meta Platforms (META), Alphabet (GOOG), and Cigna (CI), among others. Surprisingly, his latest 13F filing revealed that he sold all his holdings and bought only one stock, GEO.
This action is considered a rare move that is not taken by hedge fund managers in general, as they are dumping all their holdings and betting on a single stock. Although his position is currently valued at $3.31M, Burry’s ownership of GEO will put the company under the spotlight in the upcoming quarters.
Moreover, over the second quarter, several other institutional investors made changes to their positions in the company. Blackrock added more than 127,000 shares to its holdings, while Two Sigma Advisers boosted its stake by 33.7K shares. On the other hand, several hedge funds sold some of their GEO shares during the quarter, such as Millennium Management and Renaissance Technologies.
Overall, Geo Group Inc. posted revenues of $588.18M during the second quarter of 2022, up 4% from $565.42M during the same period of 2021. Geo conducts its operations through four reportable segments:
- US Secure Services: This segment constituted 62% of 1H22 revenues and includes the US services business. During the first half of 2022, revenues decreased by 6.7% compared to the first half of 2021 reaching $704.65M;
- Electronic Monitoring and Supervision Services: all monitoring services and treatment programs are included in this segment. It represented 18% of 1H22 revenues which increased significantly during the first two quarters to $209.41M compared to $125.21M during 1H21, up 67.2%;
- Reentry Services: This segment includes services related to treatment, educational and community-based programs, in addition to pre-release and halfway house programs. The revenues of this segment decreased 16.4% during the first half of 2022 ($127.15M compared to $152.17M during the same period of 2021), constituting 11% of 1H22 revenues;
- International Services: includes revenues generated from operations in South Africa and Australia, which represented 9% of 1H22 revenues, decreasing 9.9% to $98.16M down from $109.00M during the first half of 2021.
Last August, GEO reported better-than-expected second-quarter 2022 results. Its revenues reached $588.2 million, compared to $565.4 million for 2Q21, while net income came in at $53.7 million, up from $42.0 million in 2Q21.
This strong operational and financial performance pushed GEO management to increase their guidance for 3Q22. As such, net income is now expected to be between $39M and $42M, while revenue expectations are between $603-608M, compared to the earlier consensus of $555.80M. Furthermore, adjusted EBITDA is expected to be between $131 and 138 million.
For 4Q22, net income is expected to be between $27M and $32M, revenues between $600M and $605M, up from $552.76M expected previously, and adjusted EBITDA between $127M and $135M.
During their latest earnings call, GEO Chairman George Zoley
“We expect our diversified business units to continue to deliver strong financial performance for the balance of the year and we have increased our financial guidance for the year. We expect our full year 2022 net income attributable to GEO to be in a range of $158 million to $166 million and our full year 2022 adjusted EBITDA to be in the range of approximately $515 million to $530 million.”
A Good Buy?
During the recent period, there has been a lot of good news about The Geo Group Inc. Moody’s upgraded its rating from Caa2 to B3 with a stable outlook, Michael Burry’s hedge fund sold all of its holdings and purchased only GEO shares, and management increased its guidance for the rest of 2022 supported by strong operational performance. Additionally, GEO is currently trading at a trailing twelve-month P/E of 2.94x compared to the REIT and Equity Trust industry’s P/E of 13.63x.
Can this stock be an hedge against recession and inflation? Only time will tell.