Over the last year, USEC Inc. (USU) has fallen from a stock price of over $22 to just over $6. The stock has recently moved upward after falling as low as $3.15, but has since recovered somewhat. Since my call on fool.com, the stock is up 16.82%. Last year USU moved up quickly and was grossly overvalued, but the sell off was extreme and I believe this stock has higher to go in the upcoming months.
USU has had many critics, and many reasons not to support nuclear energy. It seems inevitable that current energy pricing will not increase the need for more power through electricity. The biggest problem with current plans is with hybrid vehicle production. In the very near future, we will have hybrid vehicles that will be plugged in at home for the purpose of taking the pressure off oil inventories. This move of using electricity in conjunction with combustable engines seems to be part of the equation. Other methods are starting, such as the use of natural gas to propel government and other vehicles, as with Clean Energy Fuels Corp.(CLNE). There is also talk of a development stage use of hydrogen, but it is far enough off that we need something that will work in the interim.
When looking at USU, it is better to focus on the positives with respect to the company. Worries that USU would not be able to come up with financing for its new plant have recently been stifled by anticipation it will have a DOE guaranteed loan. This is by no means for sure, but prospects are good.
USU is the only uranium enrichment facility in the United States. It provides half the nuclear fuel to the US and a third to the rest of the world. It acts as the executive agent for the program to convert the US and Russian nuclear warheads into fuel. As of the end of last year, its order backlog was $6.5 billion. If we are to look long term at this company, its American centrifuge will dramatically cut costs, as its margins have been pressured by the increased cost of electricity.
Nuclear energy has many advantages. Its zero emissions and reliability are very important, as it can be used as base as it is not reliant on the weather such as wind or solar. Electricity production costs by nuclear are cheaper than any of the fossil fuels. It is currently, the third largest source of electricity in the United States and provides approximately 20%.
Current valuation seems inexpensive as its PE ratio is only 10 times earnings. The company's forward PE is even better at 6.69. Earnings for the current year are already valued correctly in the stock price and next year is estimated to increase by 190%. I believe this stock is a good buy at these levels.
Tuesday, 10 June 2008
"USEC (NYSE: USU) is the nation's leading supplier of enriched uranium for use in commercial nuclear power plants -- in fact, it is the only supplier," notes value investor Nathan Slaughter.
In Half-Priced Stocks, he explains, "Low-enriched uranium is commonly used as fuel in nuclear reactors, and no other company in the U.S. provides it, giving USEC a dominant position in a key niche market."
Turnaround time for pharmaceuticals?"Its competitive advantage? USEC has the single best competitive advantage there is: zero competition -- at least in the United States. While the firm does have a handful of rivals overseas, it has reaped the benefit of being the lone U.S. supplier.
"The company has also been awarded lucrative contracts to perform work for the U.S. Department of Defense. The company also benefits from the nation's longstanding nuclear non-proliferation treaty with Russia.
"Specifically, it participates in the salvaging of old Soviet nuclear warheads under the 'Megatons to Megawatts' program, which essentially gives the firm a sharply discounted source of uranium.
"And, given the federal government's continued push toward alternative energy, regulators have a vested interest in seeing USEC prosper and could help the company obtain financing for new projects by backing its debt or assisting in other ways.
"Right now, there are 104 nuclear power plants operating in the US, and those facilities get roughly half of their uranium from foreign sources. However, incoming shipments from Russia (which account for about 40% of the nation's fuel) are scheduled to be cut in half within the next five years.
"In short, USEC doesn't have the capacity to meet demand now, and supply could be even more restrained in the coming years -- meaning the company won't have to worry about finding customers. And until new capacity enters the market, prices should remain firm.
"And that's just here in the United States. Demand for nuclear power is also on the rise elsewhere around the globe. In fact, the World Nuclear Association is forecasting the addition of 70 new reactors by 2015.
"And keep in mind, USEC has already built up a sales backlog of $6.5 billion, more than triple the revenues it reported all of last year.
"At the moment, USEC is still operating out of its Paducah, Kentucky plant, which relies on an outdated, energy-intensive process. However, the company is rapidly moving forward with the most advanced uranium enrichment plant in the world, a state-of-the-art Ohio facility that will use energy-efficient centrifuge-based technology.
"Unfortunately, rising prices for everything from materials to labor have led to cost overruns, and the budgeted $2.3 billion plant is now projected to cost upwards of $3.5 billion.
"The increased cost has caused many frustrated investors to pull the plug, sending the shares spiraling from $25 down to around $5.
"However, those with a less myopic viewpoint have plenty of reasons for optimism. According to Morningstar, the new centrifuge plant will require far less personnel to run and will operate on 95% less power, both of which should help profit margins expand considerably.
"Furthermore, many old contracts with utility customers (which were indexed to overall inflation rather than faster-growing energy costs) are set to expire, and new contracts in force will allow for more favorable terms.
"USEC is a classic Ben Graham pick. The company is now trading at just five times trailing cash flows, offers a stable earnings outlook, and has a healthy balance sheet sporting $161 million ($1.46 per share) in net cash.
"And since the most recent financial snapshot, the company just paid $5 million to acquire a 74-acre uranium enrichment facility in Tennessee with an assessed value in excess of $13 million.
"Perhaps most important, net tangible assets have risen 45% over the past two years and currently stand at $1.3 billion, or roughly $11.84 per share -- meaning the stock is trading at less than half of its book value."
