Cameco: Nuclear's Bright Future Is Already Priced In

Thesis Summary

While oil is heating up, Uranium’s price has appreciated over 40% in the last year, and the outlook for nuclear energy seems very bright here.

Cameco Corporation (NYSE:CCJ) has appreciated over 38% in the last year, as Uranium prices have hit record highs. This is a company with a long history in this market, a robust backlog and a very strong balance sheet.

Analysts think EPS will more than double over the next year. However, a lot of this seems to be priced in, and there are also other considerations with CCJ.

Nonetheless, I’d consider any meaningful dip as a buying opportunity.

Energy Is Hot, But So Is Nuclear

Oil is making headlines as crude breaks above $90. Black gold is back on investors' sight, and though there is definitely an opportunity for investors, the higher oil price could also negatively affect the broader market.

Though higher oil prices can be lucrative for investors, our objective as a society is to cheapen the cost of energy and, in fact, the more expensive oil gets, the more reasons to transition to other forms of energy.

A recent article by fellow Seeking Alpha analyst Clem Chambers highlighted how oil could reach $300/barrel on an inflation-adjusted basis. Now, I don’t necessarily disagree with this. I have been an oil bull for some time. However, if indeed energy prices spike to this extent, then it is very likely that we will see alternative forms of energy take center stage.

In fact, there’s already an energy commodity that has been outperforming oil in 2023:

That’s the Sprott Physical Uranium in orange, which has rallied over 43% in 2023, substantially more than oil, which has appreciated 17% in the same time frame. Though this hasn’t gotten as much press as oil, Uranium is beginning to turn heads as it hits a 12-year high.

But what’s the bull thesis for nuclear power? And how can investors profit?

The Tides Are Turning

The case for nuclear has been well-established for some time now. It’s cheap to produce, and with advancements in technology, it’s a lot safer than most people think.

Still, that hasn’t stopped countries around the world from shutting down plants and passing regulations to stop nuclear power, but the tides are turning.

The leading force behind nuclear has actually been China.

China has 21 nuclear reactors under construction which will have a capacity for generating 21.61 gigawatts of electricity, according to the International Atomic Energy Agency. That is more than two and a half times more nuclear reactors under construction than any other country.

That’s 21 out of 60 new reactors being built worldwide. But the US is following suit. Just last month, the first nuclear reactor built from scratch in over a decade began to operate in Georgia.

But why is nuclear power gaining popularity now? I’d say there are a couple of key reasons.

Firstly, decarbonization efforts are pushing out fossil fuels at a time when renewable energies like wind and solar simply aren’t enough. Enter nuclear.

On top of that, with China leading the way, a lot of other countries are left with little choice. It is one thing to deliberately cut fossil fuels and use less efficient but more green energies if everyone is doing it, but if the world’s second-largest economy is taking advantage of this cheaper and more efficient source of energy, then other countries will be compelled to do it too.

Demand for uranium in nuclear reactors is expected to surge 28% by 2030 and nearly double by 2040 as governments ramp up nuclear power capacity to meet zero-carbon targets, the World Nuclear Association said earlier this month in its biennial report.

Source: Seeking Alpha

Demand is creeping up, while supply has been decreasing since 2016. According to the above-cited article, uranium production dropped by a quarter from 2016 to 2020.

High demand and low supply lead to higher uranium prices. Okay, but how do we profit?

Cameco Is Just Getting Started

CCJ is, in my opinion, one of the best ways to play this bullish market in nuclear/uranium. We can see that a strong correlation exists between the two:

Cameco provides uranium to power plants, and operates in two main segments; Uranium and Fuel Services. The first is responsible for mining uranium, while the latter processes the raw material.

Now, let’s look at the latest earnings to see how the company has been doing.

Interestingly, CCJ's revenue has declined year-on-year, coming in at $482 million. However, we can also appreciate that over the last 6 months, the company is doing better than last year. In other words, the quarter before this one was very good.

Looking at the overall trend, we can see that revenues, which had been declining over the previous 7 years have begun to climb.

Most notably, operating income has increased, and Wall Street seems to have some pretty bullish forecasts. This can also be seen in the EPS forecast.

EPS are expected to grow over 100% this year and the next.

Lastly, another bright spot for CCJ is its robust balance sheet.

Assets more than cover liabilities, and to this we can also add the fact that CCJ has a very large order backlog, with commitments over the next 10 years.

Other considerations

Though CCJ looks like it has a bright future, there are also a couple of things to consider:

CCJ has never been cheap, and this is even more the case now, after a 38% run-up in the stock. Even looking at PEG, this stock is expensive.

Furthermore, there are some subtleties from one of the previous slides that we have to highlight. In the slide shown above, CCJ says, “Active Long Term Contracting, But remaining selective to maintain exposure to incentive pricing”.

What this means is that at least part of CCJ's future revenues are already locked in, meaning a higher price of uranium won’t increase their revenue. This is something investors must be aware of, as it could put a dampener on CCJ's performance.

Takeaway

I think CCJ is a great long-term play for those looking to get exposure to nuclear energy. I, in fact, recommended this stock to subscribers and has been part of my “End Of The World'' portfolio since the beginning of the year.

With that said, the valuation is rich right now, and I’d expect to see at least a bit of a pull-back for technical reasons. I’d consider any meaningful dip as a buying opportunity.

This is only one of the many stocks inside My "End Of The World Portfolio". Designed specifically to thrive even in the harshest of markets.

Subscribe now to receive

- Full Access to the EOS portfolio

- In-depth analysis on select stocks

- Weekly Macro newsletter

- Coverage of "Alternative assets"