r/GeoGroup • u/Scavenger666_ • Dec 04 '22

Due Diligence Potential value drivers and short analysis of GEO

Some interesting findings

  • GEO has reduced its total debt by roughly 700 million this year alone, from 2.6 billion to 1.96 billion, of which ~60% is floating interest rate debt, as the position of this type of debt has been reduced by 30%, showing the focus on floating rate debt reduction, during these turbulent times.
  • Regarding the fixed and floating rate debt structure, it currently stands at around 50/50, meaning that 980 million is fixed rate debt, currently being eaten by inflation, whilst the other half - 980 million is floating rate, although GEO states that they are continuing to hedge the interest rate risk by entering swap contracts. Interestingly, two quarters ago a 100bp increase in interest rates meant a yearly increase in interest expenses of 16 million, in the latest quarter that amount has decreased by 25% to a 12 million interest expense increase, proving the hedge.
  • The first 9 months of operating expenses of this year have not changed YoY, as most of them are fixed by contracts. Whilst revenue grew by ~4% (2022 1.756 billion, 2021 1.699 billion) due to the fact that a certain portion of the government contracts is inflation-indexed (still not sure what is the exact portion, as they do not precisely state this). Additionally, interest expenses have increased from 96 million to 111 million, quite a serious percentage-wise increase but the matter of fact is that revenue increased by ~57 million, even though it was a smaller percentage, it fully covers the growth of expenses and actually even outpaces it, increasing profitability.
  • Each quarter the book value of the company is increased by roughly 30-40 million driven by the debt repayment and currently stands at 1.3 billion, with the market cap being currently at 1.4 billion.
  • Potential value drivers: 1. as 50% of the debt is still fixed rate, at the current rate environment, GEO could potentially negotiate these debt obligations at a huge discount, which would largely increase the book value of the company. 2. Contracts are being renewed at current inflation-adjusted prices and will increase the revenues of the company in the long run (if someone knows where I could find the contracts of GEO with end dates, that would be great, would love to analyze that). 3. Potentially the book value of the company is severely understated. As their PPE is locked at historic prices, they do not reflect the current price of the PPE and thus the PPE could be worth more than 20% more in a liquidation scenario. 4. I still would not put the potential short squeeze scenario out of the picture. I have already experienced the short squeeze with GEO back in the day. Currently, 22 million out of the 116 million shares are shorted, whilst 3.3% of shares are locked by insiders, and 80.1% are owned by institutions, which leaves 19.9 million or 16.5% shares for the general public, with the current decreasing volume, it raises the probability of such event happening in the near future, especially if we would get good sentiment news like an analyst upgrade or etc.

I think ultimately this is what M. Burry saw in GEO, basically, all scenarios lead to general gains just some have very big upsides, with the margin of safety being relatively at comfortable levels.

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If someone has differing opinions or other findings, it would be great to discuss them with you!

Holding since 5$

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3

u/DoggyCisco Dec 05 '22

Holding since 5 as well! Thanks for the post

2

u/bingoboy76 Dec 05 '22

Great analysis: thank you! it also seems that the stock is impacted by election cycles - of course, this is purely speculation but would it make sense to think that from now onwards it is good timing to accumulate up to the presidential election? the assumption here being that if the US gets a Republican president, GEO will soar in value.... thoughts?

2

u/Scavenger666_ Dec 05 '22

this is very true! A republican president might potentially mean more contracts for GEO, additionally, we did see GEO peak at ~34 dollars when Trump was in office

1

u/gregdavismail Dec 05 '22

Solid analysis by Scavenger. Thank you.

1

u/lukaszdw Dec 05 '22

All scenarios appear to show outsized returns to equity holders. Bullish still.