Over the past six months, CoreCivic’s shares (currently trading at $21.25) have posted a disappointing 7.4% loss, well below the S&P 500’s 4.1% gain. This might have investors contemplating their next move.
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Why Do We Think CoreCivic Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than CXW and a stock we'd rather own.
1. Decline in Average available beds Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like CoreCivic, our preferred volume metric is average available beds ). While both are important, the latter is the most critical to analyze because prices have a ceiling.
CoreCivic’s average available beds
came in at 66,776 in the latest quarter, and over the last two years, averaged 3.3% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests CoreCivic might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
CoreCivic’s full-year EPS dropped 17.9%, or 5.6% annually, over the last three years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, CoreCivic’s low margin of safety could leave its stock price susceptible to large downswings.
3. 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 10.2 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. CoreCivic’s free cash flow margin for the trailing 12 months was 6.4%.
Final Judgment
CoreCivic falls short of our quality standards. After the recent drawdown, the stock trades at 24× forward P/E (or $21.25 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
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