It would be a wonderful world if we didn't need prisons, but unfortunately we do. In fact, the prison population continues to grow, especially in the U.S. According to the U.S. Department of Justice, America has the largest number of inmates relative to its population: for every 100,000 residents, 750 are in prison.

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A Thriving Business
Since 1984, the U.S. prison population has more than tripled, according to U.S. Department of Justice data. That may not be a statistic to be proud of, but it's a reality we must confront. With state budgets being cut across the board due to declining tax revenues, prison budgets are also being slashed. This creates opportunity for private prison systems.

The grim scenario is that demand for prison beds is growing faster than supply; unfortunately, recessions may actually see an increased crime rate.

The Private Three
The major publicly traded private prison companies are Corrections Corp. (NYSE:CXW), Geo (NYSE:GEO) and Cornell (NYSE:CRN). On the surface, none appears to be screaming bargains based on the fundamental valuation variables.

Corrections Corp., the big daddy of the group, is currently selling for 20 times earnings and two times book value. However, according to a recent article in Barron's magazine, these three businesses were trading at P/E multiples of more than 30 before the state budget crisis hit. That difference is certainly no reason to make any investment in today's world.

But the unfortunate reality is that state budgets just don't have the cash to construct new prison facilities. And as is often the case, the private sector can usually do things less expensively than governments can.

Geo and Cornell trade at P/E ratios of 16 and 14, respectively. The apparent discount from Corrections Corp. is due to the fact that Corrections has a more dominant position with 39% of the market, versus 25% for Geo and 10% for Cornell.

A Matter of Security
The private prison system is, unfortunately, a growth industry. More and more states will seek to outsource whatever budget items they can if it leads to cost savings. These three private prison companies control nearly 75% of the market. They merit a closer look. (For related reading, check out Competitive Advantage Counts.)

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