Hands down, the most unethical industry deep dive we’ve done

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How you going? [00:00:31][15.8]

Alec: [00:00:31] I'm very good. Bryce back in the new studio. The new studio now has a new table? [00:00:35][3.9]

Bryce: [00:00:35] Yes. [00:00:35][0.0]

Alec: [00:00:36] And some new decorations. [00:00:37][1.0]

Bryce: [00:00:38] Yes. [00:00:38][0.0]

Alec: [00:00:38] I'm moving up in the world. [00:00:39][0.6]

Bryce: [00:00:39] That's it. Plenty more to come. But if you want to keep track of how it progressing in the studio, you can check us out on YouTube. Similarly, follow us on Instagram. Otherwise you can hear us on audio. [00:00:53][13.4]

Alec: [00:00:53] That's it. That's it. And we have a lot to cover today. We are right in the middle of earnings season, reporting season, whatever you want to call it. We've got a lot of companies telling us what's going on. [00:01:03][9.8]

Bryce: [00:01:03] That's it. Ren big episode today, earnings wrap. Then we're going to have a quick chat about what Michael Barr is doing and then we're going to turn to an industry Deep Dive. We haven't had one for a while. We've got a very interesting, unethical industry coming. [00:01:16][13.0]

Speaker 1: [00:01:17] Off, hands. [00:01:17][0.2]

Alec: [00:01:17] Down, the most unethical industry deep dive we've ever done. [00:01:21][3.9]

Bryce: [00:01:22] Yes, but it did it did create some questions in the office during the week. So we felt like it was an interesting one nonetheless to explore and one that brought up some interesting facts that we weren't aware of. [00:01:33][11.9]

Alec: [00:01:34] Yeah, yeah. Some interesting facts, some interesting ethical questions. Really just an interesting fact that the industry exists at all. But let's not go there first because let's start with earnings. We've got so much information. But Bryce, let's start with a question that's on everyone's lips. Is Elon Musk going to buy Manchester United? [00:01:52][18.9]

Speaker 1: [00:01:53] Everybody's lips, come on. I'm definitely not on my list. [00:01:55][2.5]

Bryce: [00:01:56] No is the answer yes. He's just the ultimate troll. [00:01:59][2.8]

Alec: [00:02:00] Yeah, well, he he tweeted that he was going to buy it as a joke. Yeah. And then he clarified a couple of hours later that it was a joke. Yeah, but the world had already picked up on it. The Glazers, the family, that owner came out and said they were open to selling a minority stake. They didn't say to Ellen Manchester United's listed though, which is interesting. And so we did some we did a comparison of Twitter and Manchester United. Which one would you rather buy? Both losing money? [00:02:27][27.1]

Speaker 1: [00:02:27] Yes, both losing money. [00:02:28][0.9]

Bryce: [00:02:29] Stocks up 20, 20% since the 9th of August, but both. [00:02:32][3.4]

Alec: [00:02:32] Losing money and neither have won an English Premier League game in 2022. [00:02:36][3.7]

Bryce: [00:02:37] Very true, very true. Let's move on. Ren. BHP have had another record year. Revenue is up 18% to $72 billion. Profit is up 173% to $30.9 billion. [00:02:53][15.3]

Alec: [00:02:54] Yes US dollars. [00:02:55][0.8]

Bryce: [00:02:55] US dollars dividend up 8% 3.25 and they've had a massive sell down of their debt to the tune of $4.1 billion a year ago to now only just 300 million. [00:03:08][12.8]

Alec: [00:03:09] Yeah. Yeah. A bumper result for BHP. I mean it's a tale as old as time. Well it's a title as all those 2022 that commodity stocks have done really well. The question for BHP shareholders and for the market is is this the peak of iron ore prices and commodity prices and coal prices really for BHP peaked? And are we now going to see them fall away and is this like the high point in the cycle? I mean, maybe, but you'll have to say 31 billion USD in profit. [00:03:39][30.5]

Speaker 1: [00:03:40] Yes. [00:03:40][0.0]

Bryce: [00:03:42] Well played to BHP. So Magellan ran one of the more well known fund managers here in Australia have assets under management are down 48%. Yeah. [00:03:51][9.5]

Alec: [00:03:52] And we should disclose that Magellan owned a small part of equity. Maybe they do, but yeah, assets under management down 48% from $117 billion a year ago to $61 Billion today. The fund management business is all about scale. You make money from your management fee and your performance fee and the less money you have to invest, the less management and performance value you're picking up. [00:04:15][23.4]

Bryce: [00:04:16] Well, they still managed to turn a profit of $400 million. [00:04:19][3.6]

Alec: [00:04:20] Yeah. Only down 3%. [00:04:21][0.7]

Speaker 1: [00:04:22] Yeah. [00:04:22][0.0]

Bryce: [00:04:22] Doesn't really compare to the 48% down in assets under management. [00:04:25][3.2]

Alec: [00:04:26] Yeah. Yeah. Dividend down 15%. They sold their 12% stake in Guzman and Gomez. The Mexican fast food franchise. [00:04:35][8.8]

Bryce: [00:04:36] Made a pretty good return. [00:04:36][0.6]

Speaker 1: [00:04:37] On that as well. [00:04:37][0.3]

Alec: [00:04:37] Right? Yeah, yeah. What a great business. I've definitely contributed to that. [00:04:40][3.2]

Speaker 1: [00:04:40] Business is. [00:04:41][0.4]

Bryce: [00:04:42] Guzman. That is you're talking about. Yeah, yeah, yeah. All right. Let's keep moving. Is travel back corporate travel management a stock that I remember when we were at uni? It was an absolute market. Darling, it is back in the black. [00:04:53][11.6]

Alec: [00:04:54] Yeah. So they lost $55 million last year. Not surprising given travel sort of dried up. A lot of companies weren't using their booking system to book their corporate travel. Yeah, this year they made $3.1 million in profits, so they're back in black revenue of $377 million, up 117%. But a. Hey, watch out here. And I think that's really the takeaway I'm taking from earnings season generally. My overall vibe of the US, Europe and now Australia is the numbers are good, but there's warnings in the outlook and the warning in the outlook here. They're finding hiring difficult and they warned of a global shortage of travel industry people. So if you're a travel industry person, it sounds like you can probably write your own ticket in terms of where you want to work. And I feel like that's that labour shortage story is playing out everywhere. Yeah, we'll get to retailers in a second. But that sort of theme of good numbers, but watch out in the forecast sort of plays out there as well. [00:05:52][58.4]

Bryce: [00:05:54] CSL, another company here in Australia that is a loved, dearly loved revenue, up 3% with profit down 3% struggled during the pandemic as blood donations fell. We all we all saw that and the headlines company now says that they're their two years behind where they projected in terms of blood donations, which is not great to hear. We all know the importance of giving blood. Other business lines have done better, though their vaccine side of the business sales were up 16% and they hit record volume of 135 million doses being distributed. Yeah. [00:06:31][36.7]

Alec: [00:06:32] That was just for flu vaccines. Have you got your flu shot? [00:06:35][2.9]

Bryce: [00:06:36] I haven't actually, and I absolutely romped by it. [00:06:38][2.5]

Alec: [00:06:40] Anyway, winter's almost done. We're coming. We're rounding our way into spring. Here you can see Elijah Bryce before we get to your favourite part of the market, the retail part of the market, I want to talk about Tassal, a company we haven't spoken about a lot here, big salmon producer down in Tasmania. They sold 43,000 tonnes of salmon over the last year. It's a lot of salmon up 15% from the year before. Revenue up 33% to $789 million, profit up 60% to $55 million. But that's not why I want to talk about them. I want to talk about them because they are the story of persistence. You're not going to be able to invest in Tassal for a lot longer because Cook, a Canadian seafood giant, has finally got their target after three failed bids to take over Tassal. They up the price every time and they finally got their target. They originally put a bid in at 4.67 a share. They got their target at 5.23 a share. If you're a Tesla shareholder, you won't be for long because the company is getting bought by a Canadian giant. [00:07:46][65.7]

Bryce: [00:07:46] Yeah, two things. Persistence on both sides, persistence from Cook and I guess persistence from Tassal to get the price they want it. [00:07:53][7.0]

Speaker 1: [00:07:54] True what. [00:07:55][1.2]

Alec: [00:07:55] You always reject the first. [00:07:56][0.9]

Speaker 1: [00:07:56] Off. Yeah and the second and. [00:07:58][1.5]

Bryce: [00:08:00] I saw on Twitter that Andrew Brown has been on the show many times as well. He I'm pretty sure he's a Tassal shareholder and had some commentary around his thoughts on what was going on there. So if you're interested, check out his his Twitter account, retail Ren. [00:08:14][13.9]

Alec: [00:08:14] Let's get to it by chomping at the bit. The last week has been a bumper retail report both in the States and in Australia. Tell us what you've learnt. [00:08:25][11.0]

Bryce: [00:08:26] I've learnt that it's a story of revenue up, profit down. Yeah. [00:08:31][4.4]

Alec: [00:08:31] And what does that mean? [00:08:31][0.5]

Bryce: [00:08:32] It means the internal costs of the businesses are going up and they're not passing those on at this stage through to to customers. So Mart total revenue was $152.9 billion for the quarter, up 8.4%. [00:08:45][13.6]

Alec: [00:08:46] To interpose on that for a second. $152 billion for the quarter remains there. That's a $600 billion revenue run rate business. [00:08:54][7.6]

Speaker 1: [00:08:55] Yeah, it's massive. It's just a giant. It's a giant. [00:08:58][3.1]

Alec: [00:08:58] Who hits $1,000,000,000,000 in revenue. First, you'd probably say Amazon, maybe Alibaba or Walmart. You probably couldn't think of any other businesses that would would get there. [00:09:10][11.2]

Bryce: [00:09:10] No. Well we should do a comparison between how many companies of the ASX 200 fit into one of Walmart's revenue, like BHP pumped out 70 billion in revenue. So it's two and a bit. [00:09:23][13.3]

Alec: [00:09:24] True but no, no, that was 70 billion for the year. [00:09:27][3.4]

Speaker 1: [00:09:28] This is Walmart for the quarter that you can't say. Exactly. All right. Let's go back to the checkout. [00:09:33][4.9]

Alec: [00:09:33] Our social media. You'll see that by the time the subsides will. [00:09:36][2.5]

Bryce: [00:09:36] So anyway, huge, huge revenue up eight and a half per cent same store sales, a very important measure in retail, up six and a half per cent, which is pretty impressive. But profit was down 6.8%. Still turning a profit though of just shy of $7 billion for the quarter. Home Depot revenue up 3%, same store sales up almost 6% and an interesting one. Sales per square foot, which we also measure in retail, is 5.7% growth. Again, profit up warning though for the for the three month period ended July 31. Total customer transactions have slipped by a. Out of tune of 20 million. This time last year, an average ticket grew 9%. [00:10:20][44.1]

Speaker 1: [00:10:21] Less customers buying more. [00:10:23][1.3]

Bryce: [00:10:23] Buying more and increased costs. [00:10:25][2.3]

Alec: [00:10:26] Yeah. [00:10:26][0.0]

Bryce: [00:10:27] Yeah. So it'll be interesting to see the next quarter from these guys. Anyway, we'll keep going. Super Retail Group. [00:10:33][5.8]

Speaker 1: [00:10:33] I mean, it will always be interesting to see the next go. [00:10:35][1.9]

Bryce: [00:10:36] Super retail group there. The owner of Bcf boating, camping, fishing, rents, favourite store and rebel sport revenue up 3%, profit down 20% though. But we did see some strong online sales up 44% now representing a total of 17% of group sales. Good to see Temple and Webster revenue up 31% to 426 mil, while profit was down a staggering 31%. So all those input costs to furniture getting pumped. All right. And to close it out, Ren JB Hi-Fi have also reported. [00:11:08][32.3]

Alec: [00:11:09] Yes. So revenue of 9.3 billion up almost 4%, profit up to half a billion dollars, up 8%. Dividend up 43%. JB Hi-Fi feels like the retailer that just keeps on keeping on for people outside of Australia Day started as like a day and day retailer and while all the other day sellers got decimated sanity HMV, they really pivoted and they just keep on going. It's pretty impressive beat analyst forecasts again, but the watch out as we keep saying, they have warned about, you know, cost of living pressures and stuff going forward. [00:11:47][37.9]

Bryce: [00:11:48] Well they go that's a wrap for retail. Same story, it seems around the globe, increasing revenue, increasing costs, less profit. So then finally, Disney, a company that we've often spoken about, show had their best quarter ever. [00:12:03][14.5]

Alec: [00:12:03] Yeah. Yeah, well, a ripping quarter added 14.4 million subscribers to the streaming platforms. This this story is well told, so we don't really need to get into it. But they now across ESPN, Hulu and Disney have more subscribers than Netflix, 221,000,001st time they've ever reached that profit up 50%. Not bad. Theme parks. Theme parks are back in a big way. Revenue of 7.4 billion for the quarter, up from 4.3 billion last year. So they almost doubled their revenue in theme parks. But the thing that caught my eye, Disney might be getting into sports betting. [00:12:39][35.3]

Bryce: [00:12:39] Wow. Well, I mean, they have ESPN, so it kind of makes sense. [00:12:42][3.1]

Alec: [00:12:42] Well, yeah. Yeah. Although did you say Daniel Loeb, the activist investor, took a stake and is telling them they should spin off ESPN? Oh, wow. Yeah. I have been really interested in this sports betting thematic. Let's do an industry date, dive on it next week. We can talk about Disney. We can talk about some of these other companies. I think it's it's about time we looked at it again. But yeah, Disney, they're a very family friendly brand. The fact that Disney is getting into sports betting for me feels like there's a level of acceptance in America that perhaps wasn't there a few years ago. [00:13:16][33.9]

Bryce: [00:13:17] Yeah, I understand what you're saying. It feels. [00:13:18][1.8]

Speaker 1: [00:13:19] Like, you know what I mean is. [00:13:22][3.3]

Bryce: [00:13:22] Yeah, because it feels like more and more companies are popping up in America in sports betting, right? Well, it wasn't illegal in most places. [00:13:29][6.4]

Alec: [00:13:29] Yeah, yeah, yeah, yeah. Massively. Like, yeah, a lot of match fixing like the Chicago Black Sox. Look at that. They threw a World Series because they were fixing the game. So, yeah, it was all banned. It's all coming back. We spoke about, I say late last year, maybe they're making a play there, but the majority, there's a few lists in Australia that are trying to push into America. Pointsbet had that big deal with NBC, but if you if you're interested in sports betting, you've got to go to Europe and you've really got to go to the UK. There's a number of companies there. So let's let's not derail our highly unethical industry deep dive this week, but let's talk sports betting next week. [00:14:06][37.1]

Bryce: [00:14:06] Let's keep moving. All we've got here is something around. Finish. Yes. You wanted to bring it up? [00:14:11][4.3]

Alec: [00:14:11] Well, yes. So for people who haven't seen us spamming social media and listen to this podcast, we're holding Australia's biggest finance festival later this year, 15th of October. Tickets are only $47 here from some of the best experts in Australia food trucks, bars. It's going to be a lot of fun on Netflix. There's a darker trainwreck about Woodstock 99. I watched. [00:14:33][22.4]

Bryce: [00:14:33] This on the. [00:14:34][0.2]

Speaker 1: [00:14:34] Weekend. Yeah. And every night his daughter. [00:14:38][3.9]

Alec: [00:14:38] Watching it with my housemates. Last night, one episode aired and I was anxious as all get out. I was like, Oh no. [00:14:46][8.2]

Bryce: [00:14:49] For different reasons. Have you finished it? It is. I burned the whole thing to the ground. [00:14:52][2.6]

Alec: [00:14:52] Well, no, I've only seen the first episode, but you know, they've really set it up that it gets worse. [00:14:56][3.8]

Speaker 1: [00:14:56] Yeah, yeah. [00:14:57][0.3]

Alec: [00:14:57] But I was like. I was like making mental notes, you know, like they were confiscating water at the front of the water was really expensive. So I was like, Alright, we got to have free water. [00:15:05][7.6]

Speaker 1: [00:15:05] Yeah. [00:15:05][0.0]

Bryce: [00:15:06] Yeah. Making sure that everyone's comfortable was my takeaway. [00:15:09][2.6]

Speaker 1: [00:15:09] Yeah, they went. [00:15:10][0.7]

Bryce: [00:15:10] Toilets, free water, air conditioning, if you need it. Heat if you need it. Ban too many things because then it feels like you're at school all day. [00:15:18][7.9]

Speaker 1: [00:15:18] So yeah, yeah. [00:15:19][0.6]

Bryce: [00:15:19] Now we can guarantee you that if in fact you will be comfortable, all those things are taken care of. [00:15:23][4.4]

Alec: [00:15:24] We don't have corn playing to rile the crowd up, and corn was a real throwback for me. That's a band I haven't thought about in a while, so that's a good sign. But yeah, I was like, Oh my God, oh, are you going to have a taco made about us one day? [00:15:37][13.3]

Bryce: [00:15:37] Maybe for good things. But yes, look. [00:15:39][1.6]

Alec: [00:15:39] If you come to fan fest, don't riot. [00:15:41][1.5]

Bryce: [00:15:41] Don't write plays. Look, tickets are selling quickly, so make sure you jump on Equity Mates dot com slash fan fest. As Ren said, they are only $47. You'll hear from over 50 experts there on the day. And then you can join us for the official afterparty down at Cargo Bar. Another throwback depending on how old you are. Yeah, down at cargo bar here in Sydney from 6 p.m.. So it's going to be a full day affair. Cannot wait. Plenty of activity and entertainment. We did a release of some of the stages that we're building the launch pad in the greenhouse on our socials yesterday. So check us out to get a bit of insight on what it's going to look like. [00:16:15][33.6]

Alec: [00:16:15] Yeah. [00:16:15][0.0]

Bryce: [00:16:16] Or on LinkedIn. All right, let's get rolling now. [00:16:18][2.3]

Alec: [00:16:19] I was going to make a joke that one speaker that might be at Fin Fest is this next person. [00:16:23][4.0]

Bryce: [00:16:23] That's not even a joke. [00:16:24][0.7]

Speaker 1: [00:16:24] But going to here might be. [00:16:27][2.8]

Alec: [00:16:28] But let's talk about Michael Burry because so in America you have to fill out 13 F if you're a big dollar investor. And Michael Burry filled it out recently and it caught our eye and it sparked this industry deep dive. But before we talk about the industry, let's talk about quickly for people who don't know who Michael Bar is. [00:16:47][18.5]

Bryce: [00:16:47] Michael Burry is an investor famously known for calling the financial crisis over in the States the mortgage. What was it called? [00:16:55][7.9]

Speaker 1: [00:16:56] The GFC. [00:16:56][0.1]

Bryce: [00:16:57] Australia calls it JSA. The Big Short is based based on the movie The Big Short based on Michael Burry. He's a hedge fund manager. [00:17:05][7.6]

Alec: [00:17:06] You will often see when news articles are written about Michael Burry. They use a photo of Christian Bale from the movie. [00:17:12][6.3]

Speaker 1: [00:17:12] Yeah. [00:17:12][0.0]

Alec: [00:17:13] And you know what? If I was Michael Burry, I'd be okay with that. [00:17:15][2.3]

Bryce: [00:17:16] But anyway, so he's he's someone who people actively follow and keep tabs on what he's doing and made headlines when he filed his 13 F or revealed at least what US securities he has in his portfolio because there's been drastic changes. [00:17:32][15.3]

Alec: [00:17:32] So let's let's talk about we pulled out his last 213 ETFs. Yeah so let's talk about the one before the one he just filed. Yeah biggest holdings alphabet apple booking dot com Bristol-Myers Squibb a number of other companies he owned meds he owned discovery a pretty you know like standard large cap US focussed tech portfolio yeah no real surprises there then we get his filing this time and it's safe to say there were some surprises. [00:18:06][34.1]

Bryce: [00:18:07] Big surprises. He got rid of absolutely everything in the portfolio, but kept one or bought one stock, one single stock known as Geo Group Inc. And he bought $3.3 million worth of it. And it grabbed our attention because firstly he got rid of everything. And secondly, the industry that Geo Group is in is a fascinating one and this leads us to what we want to do today in our industry deep dive. But before we do that, we're going. [00:18:37][29.6]

Speaker 1: [00:18:37] To take, you know. [00:18:37][0.3]

Alec: [00:18:38] Surely we reveal what it is before the outbreak. Jail group is a private prison operator. [00:18:43][5.4]

Speaker 1: [00:18:44] Yes. [00:18:44][0.0]

Alec: [00:18:45] Well, I knew the private prisons were a thing. I didn't really realise that they were listed. That's my naivete. But that really sparked this conversation in the office. [00:18:55][9.9]

Bryce: [00:18:56] Yeah, it's pretty fascinating what they do. Ren And we are going to jump into the industry of private prisons straight after this break. So let's take a quick want to hear from our sponsors. CRM industry. Deep Dive private prisons. [00:19:19][23.0]

Alec: [00:19:20] Yeah. 4121. Most prisons operated by the state government. State or federal government will run the prisons. Private prisons get government contracts to run prisons on the government's behalf. And they are for profit companies. They and like, you know, like so many things in government that are outsourced to private industry, this is just another government service that's outsourced is how that would present it. [00:19:45][25.9]

Speaker 1: [00:19:46] Yes. [00:19:46][0.0]

Bryce: [00:19:47] Yeah. Pretty big over in the States. [00:19:49][1.7]

Alec: [00:19:49] Well we assumed pretty big over in the States. [00:19:52][2.4]

Bryce: [00:19:52] Yeah we did. [00:19:52][0.4]

Alec: [00:19:53] Turns out bigger in. [00:19:54][0.8]

Speaker 1: [00:19:54] Australia on. [00:19:55][0.6]

Bryce: [00:19:55] A percentage basis. Yeah. Of private prisons. Yeah. Okay. What are the numbers. [00:19:58][3.1]

Alec: [00:19:59] So these numbers are from 2018. 8.4% of American prisoners were held in private prisons. Now, on a raw numbers basis, it's still going to be higher than Australia. [00:20:09][10.5]

Bryce: [00:20:10] Sorry to confirm. It's not 8.4% of prisons, it's 8.4% of total prisoners. [00:20:15][5.1]

Speaker 1: [00:20:17] Correct? Okay. [00:20:18][0.9]

Alec: [00:20:18] But I mean those numbers would probably correlate pretty strongly, you reckon? [00:20:21][3.3]

Bryce: [00:20:22] What if one prison holds like 50% of prisoners in Australia? [00:20:24][2.5]

Alec: [00:20:25] I'm pretty confident it doesn't that. [00:20:27][1.5]

Speaker 1: [00:20:27] Sure. Yeah. All right, you got me. Yeah. [00:20:28][1.6]

Alec: [00:20:30] But turns out that the UK and Australia are both on a percentage basis, have a lot more private prisons, will have a lot more prisoners held in private prisons. Australia's Productivity Commission in 2018 reported 18.4% of prisoners were held in privately operated prisons. [00:20:47][17.3]

Bryce: [00:20:48] Wow. [00:20:48][0.0]

Speaker 1: [00:20:48] Yeah, far more. [00:20:49][1.0]

Bryce: [00:20:49] Than I thought. To be honest though, if someone said to me, you know, what do you reckon is the percentage of prisoners in private prisons in the States? I would have said like over 50%. [00:20:58][8.3]

Speaker 1: [00:20:58] Really. [00:20:58][0.0]

Bryce: [00:20:59] Yeah. I thought it far outweighed. [00:21:00][1.4]

Speaker 1: [00:21:01] Yeah. [00:21:01][0.0]

Bryce: [00:21:02] Government run. [00:21:02][0.5]

Speaker 1: [00:21:03] Yeah. [00:21:03][0.0]

Bryce: [00:21:03] Because you say so much about it. Poor conditions. [00:21:05][1.7]

Alec: [00:21:06] Yeah. Anyway, anyway, so, so, so in this let's just talk about the industry a little bit. And then there's three listed stocks, two in the US, one in London. The whole industry just has an X-Factor about it for obvious reasons. Like the state shouldn't be outsourcing the deprivation of liberty to private for profit companies, I think is like the overall statement and we'll get into where people fall. But I guess the main argument for private prisons is the same argument for outsourcing any government service, which is that time and time again, private companies have proven to be more efficient than governments at running certain services, i.e. cheaper. Yeah, cheaper. Yeah. Now numbers from Western Australia $270 a day to hold a prisoner in a government run facility compared to $183 a day to hold a prisoner at the privately operated Arcadia Prison. Now, the obvious counterpoint to that is, is efficiency and cost saving what you should be optimising for when you're talking about prisons? [00:22:08][61.7]

Speaker 1: [00:22:08] Yeah. [00:22:08][0.0]

Alec: [00:22:09] I would argue probably not. There's probably things like health, education, prison services, where. [00:22:14][5.0]

Bryce: [00:22:15] Rehabilitation. [00:22:15][0.0]

Alec: [00:22:15] Sometimes you spend more money because it's important to spend money. [00:22:19][3.2]

Speaker 1: [00:22:19] On it. Yeah. Yeah. [00:22:20][0.8]

Alec: [00:22:20] That would be just. I don't know, call me crazy. [00:22:22][1.9]

Bryce: [00:22:23] Not going crazy. I completely agree. I guess that brings us to the next point, which is arguments against private prisons, because for all the reasons you just mentioned there, whilst yes, cost from a government point of view is one sort of driving factor to privatise, there are plenty of things that you could argue against. [00:22:42][18.8]

Speaker 1: [00:22:43] Yeah. [00:22:43][0.0]

Alec: [00:22:43] So in Canada they did have private prisons. I don't think they really do anymore. They might have a few, but the Canadian government did a study in Ontario of two similar prisons, a government run facility and a private prison that held similar prisoners. Quote, The publicly run one had measurably better outcomes. So Canada sort of moved away from it. In Israel, they tried private prisons for a little bit, but the Israeli Supreme Court said that for the state to transfer authority for managing the prison to a private contractor whose aim is monetary profit would severely violate the prisoner's basic human rights to dignity and freedom. And so Israel struck it down after that. So there's a human rights and ethics argument, but then a 2016 report from the US Department of Justice found that privately operated federal prisons are less safe, less secure and more punitive than other federal prisons. [00:23:35][52.4]

Bryce: [00:23:36] Which will make sense, like the incentive at the end of the day for private businesses in most situations to return some sort of shareholder value. And in doing so, it's going to be a profit driven game. It's not like the shareholders of these companies are turning around and saying, Hey, the KPIs here are rehabilitation, outcomes, health, those sorts of things. [00:23:57][21.6]

Alec: [00:23:58] So now there is a there is another argument to be made here, which is you should be able to build an incentive structure for private companies to chase what you want them to chase. So you know that they have certain KPIs that they have to hit. And, you know, if, like the rehabilitation rates are. 7%. And you like track prisoners post-release or, you know, the amount of prisoners that get educated while they're in prison or like health outcomes in prison and stuff like that. There's additional payments or there's penalties if they don't reach certain milestones. You could build incentive structures in contracts, arguably to make the private prison operate in the way you want it to operate. But I think the long and the short of it is in the world that we're living in right now, those things haven't materialised. [00:24:41][43.9]

Bryce: [00:24:42] Yeah. [00:24:42][0.0]

Alec: [00:24:43] Or if they have been put in contracts, they haven't really worked based on these outcomes. [00:24:47][3.7]

Bryce: [00:24:47] Well, there is a pretty intense scandal that popped up while we were researching this one, and that was the Cash for Kids scandal. Yeah. [00:24:55][8.2]

Alec: [00:24:56] The name says a lot. Yeah. [00:24:57][1.0]

Bryce: [00:24:58] It's pretty. It's pretty intense. [00:24:59][1.7]

Alec: [00:25:00] So mid-Atlantic Youth Services Corp., not a company we're talking about today, not listed. I actually don't know if they exist anymore, to be honest, but they were a private prison company that ran juvenile prisons. They were found guilty of paying two judges, bribing two judges. They spent $2.8 million on bribes and these judges sent 2000 kids. So 2000 to these private prisons for tiny crimes, things like trespassing in vacant buildings or stealing DVDs from Wal-Mart. And that's because there was an incentive. [00:25:34][33.8]

Bryce: [00:25:35] To get a numbers game. [00:25:36][1.0]

Speaker 1: [00:25:36] Yeah, it must've been they. [00:25:37][0.9]

Alec: [00:25:37] Got paid on a per prisoner basis. [00:25:39][1.4]

Bryce: [00:25:39] And so isn't that one of the issues over there in the States at the moment? That's why there are so many people jammed into prisons because, well, obviously those people getting sent for unnecessary reason. That's a whole nother argument. I think. [00:25:50][10.9]

Speaker 1: [00:25:50] That you're opening. [00:25:51][0.7]

Alec: [00:25:51] A can of worms here. That's a lot of argument. [00:25:53][1.8]

Bryce: [00:25:54] But there it is, like you get funding per head kind of vibe. And so it's an economies of scale in some sense, which is. [00:26:02][8.4]

Speaker 1: [00:26:03] Yeah, definitely wrong. [00:26:04][0.8]

Bryce: [00:26:04] To sort of suggest. [00:26:05][0.6]

Alec: [00:26:06] But no, I think to be to be fair, some of these contracts are based on beds regardless of how many of those beds are filled. So the state of Alabama just entered into a 30 year, $3 billion deal for a private company to build and operate a certain number of prisons. That deal might not be dependent on the number of prisoners in those facilities. It might just be these these facilities cost, you know, like it doesn't need to be tied to the amount of prisoners. But clearly, in this case, it was and that incentive structure just led to the most outcomes. [00:26:38][32.3]

Bryce: [00:26:39] So and that's a bit of a high level view of industry, but we want to get to chatting about some of the companies, at least the listed private prison companies that are over in the States and one in London. None here in Australia. [00:26:52][13.2]

Alec: [00:26:53] Yeah. Although they, they exist. [00:26:54][1.9]

Bryce: [00:26:55] Yeah, but nothing that's listed. So the first is core civic. They're listed on the New York Stock Exchange. The ticker is C x W, formerly known as Corrections Corporation of America. [00:27:07][11.6]

Alec: [00:27:08] You can understand why they change their name. [00:27:10][1.7]

Speaker 1: [00:27:10] Yes. [00:27:10][0.0]

Bryce: [00:27:11] And same with Geo Group. Like it's like, oh, it was Jaguar. I mean, you look into it, it's none of their names really reflect what they're doing. But share price for Core Civic was a dollar in 2000, screamed up to about $40 in 2015. So incredible. And has now recovered somewhat and is back down to about ten bucks. Yeah, down 59% in the past five years. [00:27:37][25.5]

Alec: [00:27:38] They operate over 100 detention facilities. They're the largest, America's largest operator of private prisons. And so looking at their revenue, 37% of it comes from state and local governments, 29% from Immigrations and Customs Enforcement. So they have detention facilities as well. And then 22% from Federal prisons, the Bureau of Prisons and the US Marshals. So there's a lot of agencies that build prisons diversified. [00:28:06][27.8]

Speaker 1: [00:28:07] Well, not really. Oh, prisons. [00:28:10][2.4]

Alec: [00:28:10] So that's that's the biggest one. But then we have the one that Michael Burry is. He's operating on one stock portfolio. So tell us about Geo Group. [00:28:19][8.6]

Bryce: [00:28:19] Well, yeah, it's an interesting one. Revenue, its share price is down almost 70% in the past five years. So Barry might be looking at this as an opportunity to jump in. Obviously revenue breakdown though, 23% from BRP, Bureau. [00:28:35][15.5]

Alec: [00:28:36] Of Prisons. [00:28:36][0.2]

Bryce: [00:28:36] Of Prisons and 22% from contracts with immigration as well. So when they operate facilities all around the world, they have private prisons and mental health facilities in North America, Australia, South Africa and the UK revenue of about $2.2 billion in 2021. That's US day and huge amount of employees, 18,000 employees around the world. So pretty large and seems to be Barry's pick of correctional services around the world. But there is one more. [00:29:09][32.7]

Alec: [00:29:09] There is one more over listed over in London. Serco group Essar Pay. They provide a bunch. Services for governments around the world, not just prisons, also health, transport, defence, but big operator of private prisons. There's another one that was listed in London just for J for S, but then they got acquired by some company. And then I'm pretty sure Blackstone, the private equity player, rolled them into one of their private equity funds. So there are a number of companies investing in private prisons. [00:29:39][29.6]

Bryce: [00:29:39] Yeah, it's interesting. I'm looking at income, net income, profit for GEO. And so since 2017, share prices stumbled 70% thereabouts, and their profit has almost halved in that same period of time. So I super interesting to understand try and understand why Barry's investing in in a company that over the last 1 to 3 or four years has had sliding profits, sliding top line revenue as well. So he must be saying something that we're not. [00:30:12][32.5]

Alec: [00:30:12] Yeah. And I think that that sort of gets us to where we are today, because when Obama was in power right at the end of his term, 2016, he signed an executive order banning federal contracts with private prisons. But that didn't apply to Immigration and Customs Enforcement, just like for prisons, for people who've been convicted of crimes. Trump overturned that order as soon as he took office. And you can see on their share price charts a big dip and a flip up. 2016, 2017. Joe Biden has resigned that executive order banning those federal government contracts with private prisons. However, it doesn't include immigration. And so maybe that's the thesis that there's going to be more immigration enforcement. [00:30:58][45.5]

Bryce: [00:30:58] So sorry, there's no federal government is allowed to engage a private prison company anymore. Anymore. Everything has to be run by federal government. Correct. And everything that was privately run was overturned? [00:31:11][12.9]

Alec: [00:31:12] I don't think so. [00:31:13][1.0]

Speaker 1: [00:31:13] Yeah. Okay. [00:31:13][0.2]

Bryce: [00:31:14] Yeah, I think I. [00:31:15][1.2]

Alec: [00:31:15] Feel like there's probably they've signed the contracts and to walk away from them now. Well also just the fact that there's a lot of facilities being run that has prisoners that. They can't just relocate those prisoners. Yeah. Yeah. [00:31:29][13.9]

Bryce: [00:31:29] Yeah. Interesting. [00:31:30][0.2]

Speaker 1: [00:31:30] But in maybe a good term or. [00:31:35][4.3]

Alec: [00:31:35] Maybe just an unethical bent, I just don't know how I feel about all this. Well, I know. I know how I feel about all this. Private prison companies are now looking to expand into new markets, including mental health, hospitals, halfway houses, but also rehab and treatment orientated facilities. And obviously, we've seen the opioid epidemic and perhaps that's where Barry's like. That's the next opportunity. [00:32:03][27.9]

Bryce: [00:32:04] I guess so. But again, if it's it's all in a sent incentives game, you know, if you're having people in these facilities. But at the end of the day, it's just a for profit cost driven business structure, then our outcome is going to be any better. [00:32:18][14.1]

Alec: [00:32:18] Yeah, yeah. Great question. So, look, I think we probably don't need to say anything more about this. Ethical, unethical, unethical. Are you investing? [00:32:27][8.6]

Speaker 1: [00:32:28] No, I. [00:32:28][0.5]

Bryce: [00:32:29] Hadn't even thought about. [00:32:29][0.8]

Speaker 1: [00:32:30] It. Well, I. [00:32:30][0.6]

Bryce: [00:32:31] Didn't even know it was. And this is what I like about the world of investing, finding new things all the time. But I really I knew it was a thing over in the States. I'm super surprised at what we're seeing here in Australia. [00:32:40][9.4]

Alec: [00:32:41] I yeah I knew it was a thing over in the States I didn't know was a listed thing. That's what really surprised me. Put yourself in the shoes of a private prison CEO or owner. Why would you list. Hmm. Like, maybe it's like I want to cash out some of my percentage ownership, but it's like the scrutiny that you get as a public company. It just feels like an industry that just doesn't doesn't need to be listed. [00:33:03][22.4]

Speaker 1: [00:33:04] Anyway, anyway, let's, let's. [00:33:06][1.8]

Alec: [00:33:06] Let's, let's come back next week with an industry Deep Dive that an industry that is also probably unethical, but one that is a little bit more interesting, I think. Well, a little bit more exciting, which is sports betting. Yes. Maybe we just do a full on let's do defence. [00:33:22][15.7]

Speaker 1: [00:33:22] After the. [00:33:23][0.3]

Bryce: [00:33:25] Rain. It's great to chat stocks as always. We will pick this up next week. Make sure you head to Equity Mates dot com slash confess to grab your ticket only $47. We've got plenty of experts coming up. Tune in on Thursday and Friday to expert interviews as well and we'll see you next week. [00:33:41][16.4]

Alec: [00:33:42] Sounds good. [00:33:42][0.3]

Bryce: [00:33:44] Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at Contact@equitymates.com. Or even better go to your podcast player and leave a five star review. Also a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group. We're on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. That's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time. [00:33:44][0.0]

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