[Centrus Energy] “Promised Long-term Growth, Expected Earning Surprise, and Possible Short Recovery”

 

A strong buy on Centrus Energy stock (I hold some shares and I am buying more).  Here is my analysis on Centrus Energy.

 

“The global Uranium enrichment market, the most promising area in the fast-growing nuclear energy industry, is occupied by European, Russian, and Chinese companies.”

The nuclear energy industry is making a huge comeback driven by both market demand and government policy.  Considering the DOE’s plan to triple the domestic nuclear energy capacity by 2050, the long-term growth of the nuclear industry is just beginning.  Particularly, enriched Uranium, already used for the existing nuclear power plants and supposed to be used for any types of SMRs, is the most promising business among the nuclear energy value chain.  On the other hand, SMR reactor designer/ producers, such as Nuscale Power, Oklo, X-Eenrgy, and Terra Power are still facing uncertain futures in that it is unclear for now which SMR technology would eventually prevail.

 

The Uranium enrichment industry has significant barrier-to-entry, and the global enrichment capacity is shared by only four companies: Rosatom (Russia): 43%, Urenco (UK-Dutch-German): 31%, CNNC (China): 13%, and Orano (France): 12%.  

 

 “Centrus Energy is the only US company capable of producing both LEU and HALEU with an actual business history of running the production facility for a decade”

Centrus Energy, the only US based company, is currently importing LEU mainly from Russian Rosatom, while the company has technical capability of LEU production proven by its business history (Centrus Energy had produced LEU and supplied them to US reactors from 1993 to 2013).  Also note that Centrus Energy produced the nation's first 20 kilograms of high-assay low-enriched uranium (HALEU) in November, 2023.

 

Since Uranium is a strategic resource for national security, the Biden administration did not want its Uranium supply chain to depend on the Russian company, and neither does the Trump administration.   As it is the only US company having production capabilities of Uranium enrichment, the US government has no choice but to strategically foster the company.   All the other companies, among the six companies awarded contracts to produce LEU or HALEU production from US DOE, are foreign companies or US start-ups with new production technologies that have never been commercially proven.  Also note that Centrus Energy is the only deployment-ready U.S. technology capable of meeting national security requirements for enriched uranium.

 

 “The company’s business has been and will be continuously growing.  Specifically, the upcoming 4Q earnings may beat the market consensus.”

In the last five years, the company’s annual revenue growth rate was 10.66%, from $210M in 2019 to $320M in 2023.  Since its revenue reported for the nine month ended September 30 2024 is $290M, it is pretty sure that the company will realize another robust YoY revenue growth in 2024.  The company newly began HALEU business in 2019, and it has realized net profit margins of 18% to 59% (16% to 36%, except non-operating components) since 2020.  This is the only company that has been making both consistent profits and steady growth over years in the US nuclear energy industry.  

 

Moreover, according to the company’s IR presentation in December, its order backlog is $3.8B (including contract options and LOIs) and its Total Addressable Market is growing from $2.4B now to $9.6B in 2030 and $15.3B in 2035.  There is no doubt about the company’s growth in the next five to ten years.  
In the last earnings release of Q3 2024,  Centrus Energy reported a net loss of $5.0 million on $57.7 million.  The Q3 earnings were not disappointing, the stock price went up after the earning release.  The Q4 earnings would be even better than the Q3.  The company’s earnings do not tend to continuously increase QoQ, but to fluctuate in every quarter.  Particularly, once the company had shown a revenue surge in a certain quarter, it showed significant revenue decrease QoQ in the following quarter, and vice versa.  This might be due to the nature of the order-based business.  Its Q1 revenue was $44M, Q2 $189M, Q3 $58M, and what is the Q4 revenue likely to be?

 

Further, upon my review of the company’s earnings trend since 2021, the Q4 revenue accounts for 30~43% of the annual revenue and the Q4 net income accounts for 41%~67% of the annual revenue every year.  Historically, the portion of its Q4 earnings has been significantly higher than a quarter of the annual earnings.  In this regard, the company may realize healthy earnings in the Q4 of 2024 with significant QoQ increase, possibly beating the market consensus.   

 

“The company is deeply undervalued compared to its peers in the stock market, although it has long-term growth momentum with great fundamentals”

 What is disappointing is the company’s stock price, not its earnings.  After the company’s issuance of $350 Million of Convertible Bonds in early November, the stock price has been sluggish, showing 35% drop in the last two months.  Some might say that the potential equity dilution impact of the CB (where $350M convertible implies 18% of equity dilution with the initial conversion price of $97.50) suppresses the company’s stock price.  However, issuance of CB is a quite common option for a listed company to accelerate its business growth, and capital increases aimed at investing in business growth are positively interpreted in the stock market.  In this case, after the issuance of the CBs, Centrus announced additional investment in its centrifuge plant to expand the production capacity.  

 

Some might be worried about its high debt ratio, but it’s not gonna be a problem.  The company survived decades of dark ages for the US nuclear industry, and has just begun its long-term growth.

 

Despite the potential equity dilution issue, its high debt ratio, or whatever else, Centrus Energy is deeply undervalued in the stock market.  The company’s market cap varies around $1.15B in this month, while its revenue was $394M and its net income was $76M during the last four quarters – that is, Centrus has Price-Sales-Ratio of 2.9 and Price-Earning-Ratio of 15.1.  This is significantly lower than its peers in the nuclear energy industries: Cameco has PSR 8.2 and PER 197, Uranium Energy PSR 173, and Nuscale Power PSR 675, based on their earnings for the last four quarters.  Note that Uranium Energy and Nuscale Power realize huge net losses so that it is meaningless to calculate PER.  OKlo, whose market cap is $2.8B, does not make any revenue at all, even making it impossible to calculate its PSR.  Furthermore, Centrus’s PER is lower than a half of the market PER of Russell 2000, which is 34.6.  
I believe that Centrus Energy’s stock price should go double immediately to keep up with the average market multiple.  Plus, considering the company’s currently addressable market is $2.4B for LEU (for the only existing US reactors), its revenue would go double in a couple of years even for the worst case scenario in a highly conservative estimation (e.g., no additional HALEU sales besides the existing backlog, and no growth in the LEU market).  If its revenue doubles its profit margin should go better as the unit fixed cost is halved.  In consideration of the foregoing together, the stock price should go four times even in the worst case scenario.  For the bull cases, the stock price can go ten times higher. (Only the sky is the limit!)

 

 “The sluggish stock price may be attributed to the high short selling ratio after the company’s issuance of convertible bonds.  Short Recovery will be triggered once the stock price has risen."

 One possible reason for the sluggish stock price might be found from the short-selling activities regarding the stock.  Since the Convertible Arbitrage is a common strategy for hedge funds, I assume that some of the CB purchasers might have held a short position for the company’s stocks. 

 

According to Fintel, Centrus Energy had 3.45 million shares sold short, representing 22.95% of its float and the short interest ratio was reported as 9.01 days to cover.  The average short selling ratio of Russell 2000 is estimated to be 6.23% according to Perplexity.ai.  In light of the foregoing, the short selling ratio for Centrus Energy would be well above the market average. 

 

Although it is ambiguous to gauge the level of the short selling volume triggering short recovery, the company’s stock is exposed to a potential short squeeze to settle such high short selling volume compared to the average daily trading volume.  Also, the fact that the company is sustaining robust growth in the promising industry sector can accelerate the rise of the stock price once the stock has drawn attention from the market.