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Skin Thesis

Melissa Haloossim’s journey began at Children’s Hospital working in Pediatric Intensive Care. Following two of the most rewarding years of her life, she embarked on a new and exciting path. Melissa entered the world of aesthetic medicine, an industry...

About Skin Thesis

Melissa Haloossim’s journey began at Children’s Hospital working in Pediatric Intensive Care. Following two of the most rewarding years of her life, she embarked on a new and exciting path. Melissa entered the world of aesthetic medicine, an industry with boundless potential and promising ingenuity. For the next 12 years, she built and operated a top skincare organization, and spearheaded new advances. Melissa’s experience ignited a burning desire to build her own brand. Skin Thesis was born to deliver the latest innovations in aesthetics, incorporating the important combination of art and science. Expectations for the business were immediately exceeded as Skin Thesis garnered global attention and established an elite clientele. The Skin Thesis team is made up of experienced, talented practitioners who aspire to deliver the change our clients desire without sacrificing a natural appearance.

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GEO Group: Golden Opportunity Following The 32% Selloff

• GEO Group is set to release their Q2 2024 earnings results on August 7, 2024, pre-market.
• 32% selloff since mid-July, anticipating a net loss in Q2 in the range of $27 million to $30 million.
• New 5-year, $25 million annual contract with CSI Aviation, and a potential 5-year contract extension for their Californian ICE facility.
• Insider buying activity at $12.48 by George C. Zoley reinforces my confidence in the $12.5 support level. New experienced CFO, Mark J. Suchinski, appointed in July.
• I have a high conviction in this stock. Therefore, I rate it as a Strong Buy, and, to prove my skin in the game, I bought OTM call options, expiring in just a few months.

The GEO Group ( NYSE: GEO ) is about to release their Q2 2024 earnings results on August 7, 2024, pre-market.

In my view, there is a high chance for a positive short-term move in their share price following the earnings release this Wednesday, August 7.

In this article, I will discuss several catalysts bound to be realized before the end of this year, their recent performance, including a significant loss to be incurred in their Q2 results, some risks to my bull thesis, and as always, a brief introduction to GEO's business, for those of you that are new to this stock.

As stated in my profile description, all my strong buys come with skin in the game, especially when there is high risk involved. Therefore, I stuck my neck out, and bought OTM call options, expiring in just a few months.

Business Overview

The GEO Group owns, leases, and manages secure facilities, in other words, prisons and detention centers, and provides community services for people transitioning back into society. They also offer electronic monitoring for supervision and alcohol monitoring devices.

They operate in three countries, with the majority of their revenue coming from contracts with US government agencies. I have included a table below showing their 2023 annual revenue per country.

Table I. Revenue per country. Author compilation from the latest 10-K .

Their operations are divided into 4 business segments:

• US secure services: as the name suggests, this segment includes the US public-private partnerships for prisons and detention centers.
• Electronic monitoring and supervision services: this includes monitoring for community parolees, probationers, and pre-trial defendants in the US.
• Reentry services: this segment includes community, pre-release, and halfway house programs.
• International services: this segment covers their operations in South Africa and Australia.

Finally, I considered including a table below to show the contribution of each segment to their annual revenue and operating income.

Table II. Revenue and operating income per segment. Author compilation from the latest 10-K.

Notice that their US secure services segment contributes nearly four times more to their revenue than the electronic monitoring segment. However, they have similar operating income. This shows the higher operating expenses for the US secure services segment.

Ownership-wise, they have 136.31M outstanding shares, with a free float of 95%, which is a good indication of liquidity.

Recent performance

As always, let's start dinner with the dessert.

On April 18, 2024, they closed two private offerings, totaling $1.275 billion of senior notes, due in 2029 and 2031.

Their financing activities didn't stop there, as they further secured $450 million in a five-year term loan B. This totals approximately $1.67 billion in new debt.

Here is where it gets interesting. According to management , these proceeds, along with cash in hand, will be used to refinance $1.5 billion of the existing debt that is closer to maturity and has a higher interest rate.

At first glance, this seems positive. Their debt maturities are now pushed to 2029 and 2031, they've lowered the average cost of debt by 1%, and 75% of their total debt is now at a fixed rate.

However, in the short term, this has a significant negative impact due to fees, penalties, and other costs associated with early repayment of their old debt, which will be reflected soon in their Q2 earnings results.

This extinguishment of debt will incur a pre-tax loss of $86 million in their Q2 results. Management's guidance on the net loss for Q2 is between $27 million and $30 million, a painful loss given the net income in Q1 of $22.7 million.

In my view, I think the refinancing activities will have positive effects in the long run, although with limited benefits, as the savings are just 1% compared to the previous loan rates. Also, they succeeded in pushing the maturities forward, which is good in the mid-term (3-5 years), but it raises some concerns as to what will happen when the new maturities come closer to an end.

New air operations support contract

On March 12, 2024, their subsidiary, GEO Transport Inc., won a 5-year contract with CSI Aviation to provide air operations services for ICE.

The value of this contract is expected to generate $25 million in yearly revenues.

However, this is not the first time they provided support to CSI Aviation. In July 2023, they secured an initial 9-month contract.

I view this 5-year contract as a successful extension, indicating a strong long-term partnership with CSI Aviation, and proving GEO's competency in delivering this service.

Despite the $86 million pre-tax loss due to recent refinancing activities, their updated guidance doesn't vary excessively from their previous estimations, which I find reassuring.

When looking at their updated guidance, they increased their annual revenue projection to $2.4 billion, from their previous estimation of $2.3 billion. I view this as a strong indication of continued growth during this year.

Looking at their updated annual net income guidance, management decreased their estimations by 5 million, estimating $55 million to $75 million, from a previous guidance of $60 million to $80 million.

Despite a $5 million reduction, I view this positively, given the net loss expected in Q2 is in the range of $27 million to $30 million.

However, management's revised guidance was not the factor that contributed the most to my bull thesis.

To be fully transparent with the reader, price action prior to the upcoming Q2 earnings release was a key factor in building my conviction in this stock.

If you're a deep value investor, you might be rolling your eyes right now, but bear with me for just a few minutes.

A quick look at the daily chart below shows a decline of 36% from mid-July, 2024.

Trading View

In my view, this strongly indicates a pullback to the previous support level of $12.5 (give or take 50 cents). Additionally, and this is key, I see this selloff as anticipation of the poor Q2 earnings results due to the debt refinancing activities in April, and the overall selloff in the broader markets due to fears about a US recession.

I consider the $12.5 support level reliable, as the price has bounced off it several times since September 2016, and it even acted as resistance in December 2022.

Another indicator I favor is insider buying activity. The recent purchase in March by Zoley George C , Executive COB, of over 50,000 shares valued at $624,025, strongly signals his confidence in the share price.

Furthermore, he bought at an average price of $12.48, which coincidentally is the support level that I considered above.

In my view, the biggest catalyst is the release of their Q2 earnings results, on August 7, pre-market. The selloff suggests shareholders are anticipating a net loss in the range of $27 million to $30 million.

Therefore, if this loss is realized, it will be already priced in.

I also support their recent change in CFO, which was effective on July 8, 2024. In my view, Mark J. Suchinski is a competent individual for this role given his previous experience as a CFO at Spirit AeroSystems, since 2020, and his more than 20 years of experience in roles including Chief Accounting Officer, Vice President of Finance, and Vice President of Financial Planning.

Despite negative short-term effects, I see the debt refinancing as a good long-term decision. They managed to lower their debt cost and push out maturities to 2029 and 2031.

Another factor is the recent 5-year contract with CSI Aviation to support their air operations, which is expected to generate $25 million in annual revenue.

Finally, the last catalysis I expect in 2024 is the potential extension of their Californian ICE facility. The contract generates approximately $85 million in annualized revenues. Originally, this contract was a 15-year agreement entered on December 19, 2019, consisting of an initial five-year base period ending on December 19, 2024, followed by two five-year optional periods.

According to the latest press release , this contract has been extended through September 2024. If this contract is renewed in Q4 2024, for an additional 5 years, this will certainly have a positive impact on their share price.

Among the risks that I foresee is a reported net loss in Q2 2024 higher than expected.

This will certainly drive the share price down, breaking the $12.5 support level, which is not the best news if you own call options, like I do.

Despite their recent refinancing activities, and net debt values decreasing since Q2 2023 (see below), I still think they are leveraged, given their debt to assets ratio of 1.42.

Another factor that I see as a risk is the decrease in their net margin, as seen below.

Finally, if the 5-year extension of the ICE facility in California is not renewed during Q4 2024, I believe this will have a significant impact on their 2025 guidance, and cause a decline in their share price.

To conclude, I see high potential for a short-term move for this stock in the weeks following their Q2 earnings release.

As I already mentioned, the anticipated Q2 net loss of $27-$30 million poses a short-term risk, which in my view appears to be already priced in, following the 32% selloff since mid-July. This suggests to me a potential rebound post-earnings from the $12.5 price level, up to similar levels before the selloff.

The insider purchase by George C. Zoley at $12.48 per share reinforces my confidence at this critical support level, coinciding with historical price action behavior.

Finally, I see several catalysts, like the successful extension of the Californian ICE facility contract (with a potential 5-year extension in Q4 2024), the appointment of a new experienced CFO in July, and the recently confirmed 5-year contract with CSI Aviation.

All these factors build up my confidence in this stock. Therefore, I stick my neck out, and I own OTM call options, expiring in just a few months.

This article was written by

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GEO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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