Financial Myths: Goodness Had Nothing To Do With It – Part I

Michael McTague  |

This myth has been waiting for review for a long time. Evil – the opposite of goodness – opens some interesting business opportunities. In previous entries, we looked at companies that sell liquor and cigarettes, popularly known as sin companies. Considering Suntory’s (SUNTORY) acquisition of Jim Beam (BEAM), the ABInBev (4998880.F) and SABMiller (SBMRY) merger and Philip Morris’s (PM) $30 billion of retained earnings, this area prospers.

Many other companies and industries deal more directly with human wrongdoing and generate a good deal of business activity. Aside from lawyers, a good example is Aramark (ARMK), which provides a range of services including food, building maintenance and uniforms. Their market capitalization is slightly under $8 billion. Its Retained Earnings are negative but have improved in the last couple of years. Total revenue for 2015 was above $14 billion. Philadelphia-based Aramark serves a wide range of industries spanning education, healthcare, business and industry, sports, leisure, and prisons. The prison part is quite interesting. People know that employees, students and hospital workers and patients have to eat and need clean uniforms. Aramark provides a similar service to the massive prison population in the US.

The US has more than 195,000 federal prisoners, who are overseen by the Federal Bureau of Prisons. There is also a Bureau of Justice Statistics, which reports that the number of people in the US under some form of correctional supervision exceeds 6.8 million. About 2.2 million are incarcerated. By contrast, about 20 million Americans attend college.

One’s first impression would be that prisoners receive the same level of food service as college students and the same level of uniform cleanliness as nurses. Certainly, Aramark’s expertise in preparing large quantities of food, and following approved meal plans, and their skill in washing uniforms that must be truly clean carries over to the needs of prisons. All told, Aramark works with nearly 500 prisons and rolls more than 350 million meals annually.

In a 2012 listing of the largest food service providers in the US, Aramark ranked second. As a multi-billion dollar company, much of Aramarks’s business comes from more attractive clients such as a range of colleges and universities and the Cleveland Clinic. Their total includes 538 healthcare facilities, 491 colleges and universities, 355 school districts, 302 sports and related locations and six military sites. In terms of the myth, Aramark has won many prison contracts because of its expertise in food service and uniform preparation. While all such companies have occasional slip-ups, Aramark has convinced many government agencies and higher education providers that it is a good choice.

The Sunday Menu

Federal prisoners follow an official diet. For example, Sunday dinner includes roast beef, cottage cheese, baked potato, green beans, black eyed peas, brown gravy, wheat bread, margarine and beverage. Since prisons follow a common diet for all prisoners from murderers to petty thieves, goodness has nothing to do with it. So, the myth holds.

While the official view is that prisoners are treated fairly, there is some rancor about some services prisoners receive. Prisoner diets have been argued by elected officials who prefer to keep the cost modest. Grumbling about food quality is also common. Aramark lost a $145 million food service contract with the state of Michigan prison system in late 2015. The Detroit Free Press reported that Trinity Services Group took over the contract, which will be more expensive than Aramark. Along with goodness, cost has nothing to do with it either.

Certainly, prisons generate a great deal of business need. Lack of goodness generates other business opportunities. In addition to eating, prisoners have to be managed. The US employs nearly 500,000 correctional officers according to the Bureau of Labor Statistics. That means there are more prison guards in the US than the total population of Cleveland or San Francisco. Their salaries and benefits make a substantial total as well. This does not include court security officers, prisoner transportation, parole officers or related service workers. They all need equipment, training and uniforms. The website lists the essential equipment used by correctional officers: flashlight, key clips, boots, belt, handcuff key, cut resistant gloves, eye protection, mini first aid kit and pepper spray.

Taser guns (TASR) did not make the list. An actual Taser gun costs from about $450 and up. Less expensive stun guns are available on Amazon (AMZN). Taser’s market capitalization is about $990 million. Its share price has been close to its 52-week low lately. Revenue for 2015 was $198 million (rounded), up considerably over the last two years. Imagine where its revenue would be if these weapons were more widely accepted by state and local lawmakers.

The lack of goodness certainly breeds the need for many products and services and generates a great deal of revenue. Next month, the Myth Buster will continue the discussion on this myth, which comes from a line spoken by Mae West.

*******************

Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


Discover: Trending Events

United Nations
EU Parliament
Humanity 2.0
World Economic Forum

Companies

Symbol Name Price Change % Volume
PM Philip Morris International Inc 87.68 0.24 0.28 1,056,874 Trade
ARMK Aramark 42.57 -0.29 -0.68 137,134 Trade

Comments

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
GOOG

     
XOM

     
BRK.A

     
FB

     
JNJ

     
WFC

     
T

     
NFLX

     
TSLA

     
V

     
UNH

     
PG

     

World Economic Forum at Davos 2019 - Joseph Weinberg CEO PayCase, Chairman Shyft

Matt Bird sits down with Joseph Weinberg CEO PayCase, Chairman Shyft at the World Economic Forum at Davos 2019