Over the past six months, CoreCivic’s shares (currently trading at $19.91) have posted a disappointing 7.6% loss while the S&P 500 was down 1.3%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in CoreCivic, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is CoreCivic Not Exciting?
Despite the more favorable entry price, we're swiping left on CoreCivic for now. Here are three reasons we avoid CXW and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, CoreCivic’s 3% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the business services sector.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, CoreCivic’s margin dropped by 7.3 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. CoreCivic’s free cash flow margin for the trailing 12 months was 2.5%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
CoreCivic historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.9%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
CoreCivic isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 12.3× forward P/E (or $19.91 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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