Thursday, June 21, 2012

Corrections Corp of America (CXW) - Riksy News Elevates Vol... Sort of...

CXW is trading $26.88, up small with IV30™ unched. The LIVEVOL® Pro Summary is below.


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Corrections Corporation of America (CCA) is an owner and operator of privatized correctional and detention facilities and prison operators in the United States. As of December 31, 2011, the Company operated 66 correctional and detention facilities, including 46 facilities that it owned, with a total capacity of approximately 91,000 beds in 20 states and the District of Columbia.

This is an elevated vol note in a stock that has been a bit choppy of late. Let’s start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

There’s a lot going on here. Starting with the stock portion, I’ve highlighted two large moves. The first was on 4-24-2012, when the stock dropped from $30.31 to $27.60. Here’s a news snippet to summarize the catalyst for that move:

What: Shares of prison operator Corrections Corporation of America (NYSE: CXW ) fell as much as 11% today after California announced spending cuts.

So what: California announced plans to cut billions of dollars from the prison budget by closing a prison and bringing back inmates housed out of state. Presumably some of the inmates being brought back to California will be taken out of Corrections Corp.'s facilities.

Now what: The effect of the reduction in costs isn't known yet, but any reduction in inmates is bad for Corrections Corp.

Source: The Motley Fool via Yahoo! Finance; Why Corrections Corporation of America's Shares Dropped, written by Travis Hoium.

Just about a week later, CXW reported earnings (5-3-2012 BMO). The stock actually closed down less than a dollar from $29.01 to $28.07, but the intra-day move was quite large. That single day’s range was [$27.02, $31.36]. The news surrounding earnings was equally as odd – a lot to chew on for investors. I’ve included a rather large snippet from the Nashville Business Journal, below:

Nashville-based Corrections Corp. of America reported $31.7 million in earnings this morning and acknowledged that it is considering a major change to company structure.

The company (NYSE: CXW), which operates prison facilities for federal and state governments across the country, saw earnings in the period ended March 31 drop from $40.3 million a year ago. In a statement, the company attributed the impact earnings — which came amid climbing revenue — to a range of one-time expenses, from the start up of a new facility to debt refinancing.

President and CEO Damon Hininger emphasized the amount of new business coming in the door.

"During the first quarter we were pleased to commence a number of new management contracts, including with the state of Ohio at our newly acquired Lake Erie Correctional Institution, the Commonwealth of Puerto Rico at our Cimarron facility in Oklahoma and with the state of Georgia at our newly constructed Jenkins Correctional Center," he said.

CCA also said it is "assessing the feasibility" of converting to a real estate investment trust, which would allow it to consolidate and restructure how it handles its various properties. The company said it has been considering the shift since 2011, though shareholder groups recently ramped up pressure on that front.

Source: The Nashville Business Journal via Yahoo! Finance; CCA: $31.7M in earnings, considering REIT conversion, written by Brian Reisinger.

Pretty involved stuff there… Looking back to the Charts Tab, we can see some interesting vol phenomena as well. The first two chunks I’ve highlighted (on the left side) illustrate how the implied and the short-term historical realized vols have moved together. The first piece shows a rather quiet period where the stock sat still and the implied did as well. The second chunk illustrates how the implied rose with the stock’s realized volatility. The interesting observation here is that the current implied is not behaving that way.

We can see how the HV20™ dropped in mid-May as those big stock move days rolled off of the twenty day average. However, the implied has remained elevated. The vol comps as of this writing are:

IV30™: 38.88%
HV20™: 23.12%
HV180™: 28.08%

In English, the option market reflects elevated risk relative to the short-term and long-term historical realized movement of the stock.

Let’s turn to the Skew Tab to examine the line-by-line and month-to-month vols.

We can see that the ATM vol in Aug is elevated to Jul – this is due to an earnings announcement inside the Aug expiry (but outside Jul). I do note that the OTM puts and OTM calls are priced almost identically (in terms of vol), though.

Finally, let’s turn to the Options Tab, for completeness.

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. Across the top we can see the vols by expiry are 38.88% and 42.75% for Jul and Aug, respectively. Ultimately, the news about the prison closings doesn’t seem like good news and it also doesn’t seem like it’s necessarily over. The elevated implied reflects the elevated risk. However, there is also risk associated with earnings, as we saw in the most recent earnings report.

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