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It was bound to happen. The increasing reliance by the UK government on private firms to provide custody of prisoners was going to hit a problem sooner or later. The problem has now arrived, with the parlous state of Birmingham prison, which was being run by G4S. Shareholders of the private security seemed to be prepared to shrug off the fact that the government had been forced to step in to take control of the prison, in which it seems as if the prison population was informally running their own custody.

Will investors leave G4S shares ahead of investigation?

It is a damning indictment of the quality of the service that G4S has been providing the UK tax payer, but beyond that, it will lead to a wide ranging review of all the services that G4S is currently providing the Home Office. This is not going to go well for them and holders of G4S shares are going to be in for some disappointments ahead.

Overall we like the private security business at The Armchair Trader. It is a large and rapidly expanding industry, stepping in to manage the security services that the UK government no longer has the money to provide itself. It has benefited from the gradual trend towards the privatisation services from railways to health, which both Conservative and Labour governments have presided over.

G4S shares fell to 244.80 on the news that the government was going to be taking over the running of the prison in Birmingham. They rallied afterwards, and the market seems to have decided that somewhere around the 250 mark is the appropriate value for G4S stock. We’d beg to disagree.

Long term things look gloomy for G4S

Take a look at the longer time frame, and G4S does not look like such a good bet. G4S shares hit 282 on 8 August, but has since coughed up 15%. The current situation does not look good for G4S or its ability to maintain its other contracts. It is the first time the government has been forced to step in since it began letting private companies manage prisons in 1992.

G4S has already been blamed for a riot at Birmingham prison in 2016 and also for badly managed immigration detention centres and a secure training centre for children. While G4S still has the contracts to run four other prisons, and seems to be doing better here, the political environment does not look good for the company, with the Labour party already campaigning to nationalise the railways. It is a small step to demand the same for prisons.

On the upside, G4S could lose these contracts, and many more and still be making money, as it is an international business. But it is under pressure in other markets too, including the Middle East and India. In its latest statement it reported that core business revenue had risen 3.2% last year, while adjusted profit was 4.2% higher. Anlaysts like it and say G4S shares are cheap. Yet the share price continues its slide and as we like to say here at The Armchair Trader, where there’s smoke, there’s fire.

Selling G4S shares? Look at Serco.

So what if you decide to sell your G4S stock? Where do you go? Serco may we worth a look. Serco shares jumped today on the G4S news, so other traders are obviously thinking the same thing. Serco is a bit more diversified than G4S; while it manages security contracts, it also looks after a lot of other services for the government, including health and transport. Serco is rated a buy by several brokers, including Jefferies, Peel Hunt and Shore Capital. But it is also blessed with a lack of bad publicity and the pain of the wide ranging investigation which G4S will be facing over the next few months.

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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