GEO Group has been treading water for the past six months, recording a small return of 0.9% while holding steady at $17.85.
Is now the time to buy GEO Group, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is GEO Group Not Exciting?
We're swiping left on GEO Group for now. Here are three reasons there are better opportunities than GEO and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, GEO Group’s sales grew at a sluggish 2.3% compounded annual growth rate over the last five years. This was below our standards.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Analyzing the trend in its profitability, GEO Group’s adjusted operating margin decreased by 6.3 percentage points over the last four years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 9.8%.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, GEO Group’s margin dropped by 14.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. GEO Group’s free cash flow margin for the trailing 12 months was negative 4.7%.
Final Judgment
GEO Group’s business quality ultimately falls short of our standards. That said, the stock currently trades at 14.9× forward P/E (or $17.85 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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