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Investing

Avalon Correctional Services – a possible “Prison Break”-out?

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By Douglas A. McIntyre Published
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Posted by David Polonitza

In honor of the new season of one of the best shows on TV, Prison Break, I will profile a prison-related company that is trading below its intrinsic value

Avalon Correctional Services (Ticker: CITY) engages in the ownership and operation of community correctional facilities. The company owns 3 facilities in Texas, 3 in Oklahoma, and 2 in Colorado. It also leases 2 facilities from the state of Colorado and one from Oklahoma. In total, the company oversees over 2400 beds in three states.

In February 2005, Avalon Correctional Services filed a Form 15, terminating their registration under the Securities and Exchange Act of 1934. The company claimed their reasoning behind the de-registration was “not only in the overall best interest of the Company’s shareholders, but it was crucial for the continuation of the Company as a going concern.”

Valuation:

Avalon Correctional Services has an enterprise value as of September 2006 of 28 million dollars (All liabilities beyond cash and cash equivalents on the balance sheet plus the current market capitalization of the company) .

Earnings before interest and taxes (EBIT) will be in approximately 4.5 million dollars at the end of 2006. This is a high single digit increase from the full year 2005 (EBIT).

Therefore the company is trading at slightly over 6 times EBIT, which is a relatively conservative valuation.

Three major competitors to Avalon Correctional Services in the prison outsourcing space are the following companies:

Geo Group (Ticker: GEO)
Cornell Companies (Ticker: CRN)
Corrections Corp. of America (Ticker: CXW)

The following chart breaks down the price per bed that each current company’s enterprise value is reflecting.

Source: finance.yahoo.com, www.sec.gov, www.pinksheets.com

Avalon Correctional Services is trading at a significant discount per bed to all of their publicly traded competitors. Though there is a more significant growth component to both Corrections Corporation of America and the Cornell Companies, the discrepancy in the price per bed between the companies is still quite large.

On April 20, 2006 the Company sold their Union City facility to the State of Oklahoma for $4,400,000. This facility consisted of 160 beds, for a price per bed of $27,500.

Status as a Publicly Traded company:

Though the company no longer files with the SEC, it does provide detailed financial statements through the Pinksheets.com website

In December 2005, the MIDSOUTH INVESTOR FUND, a hedge fund with a reputation of investing in smaller companies, declared a 5.25 stake in the company, which presumably was acquired after the company filed its Form 15.

Conclusion:

Avalon Correctional Services is a statistically undervalued company with assets that are in high demand within the states that they operate in. Even if the company lost their contracts with Colorado, Texas, and Oklahoma, these states could not afford the loss in prison capacity, and would most likely purchased by the states for a value higher than the company is currently trading.

Photo of Douglas A. McIntyre
About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.

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