Centrus Energy: Production Milestone Achieved with Positive Results
Company Profile
Centrus Energy Corp. (formerly USEC Inc.) is an American company that supplies nuclear fuel for use in nuclear power plants and works to develop advanced centrifuge technology to produce enriched uranium for commercial and government uses, including for national security. Traded at a NYSE MKT with a ticker symbol LEU.
Summary
- Centrus Energy witnessed an almost 11% decline in its stock price following the disclosure of Q3 2023 results.
- Although revenues displayed robust growth, the profits fell short due to increased operating expenses.
- Nevertheless, the company's outlook appears optimistic following its successful initial delivery of HALEU to the Department of Energy and its progression toward a full year of production.
- Despite recent increases in market multiples, Centrus stands out as one of the few financially mature and profitable manufacturers in the nuclear sector.
A look back
Upon the recent release of its third-quarter results for 2023, nuclear fuel supplier Centrus Energy (LEU) witnessed a significant nearly 11% drop in its stock price. While there has been a partial recovery since then, with the stock currently showing a 55% year-to-date (YTD) increase, questions persist regarding the initial price decline. In this analysis, I delve into the latest figures to understand the factors behind this fluctuation.
Since June, the company is progressing toward High-Assay, Low-Enriched Uranium (HALEU) fuel production after successfully completing its operational readiness review with the US Nuclear Regulatory Commission (NRC). The NRC had granted permission for uranium possession at its Piketon, Ohio site, paving the way for fuel production.
Subsequently, Centrus Energy achieved a significant milestone by delivering its first batch to the US Department of Energy, initiating the second phase of the HALEU Project, which entails a full year of production (table below). This accomplishment positions the company as the proprietor of the first new US-owned enrichment plant in 70 years.
Although the Q2 2023 results exhibited a decline in both revenue and profits compared to Q1, the overall performance for the first half of 2023 (H1 2023) remained satisfactory, anchored by a robust Q1 2023 performance. It's worth noting that Centrus Energy acknowledges the occasional lumpiness in its financials due to contractual nuances, emphasizing the importance of a comprehensive assessment of its numbers.
The latest results
The most recent financial results for Centrus Energy reveal a noteworthy rebound in Q3 2023, witnessing a robust 54.5% growth in revenue after a marginal correction of 0.7% in Q2 2023. The quarter's expansion was propelled by a doubling in the Low Enriched Uranium (LEU) segment, constituting a substantial 79% share of total revenues. Conversely, the technical solutions segment, encompassing engineering services, experienced a decline in sales by 16.9%, exerting a dampening effect on overall growth.
Examining the first nine months of 2023, the overall revenue growth remains solid at 29.2%, primarily driven by two strong quarters of expansion this year.
Despite the positive revenue trends, the profit landscape is less robust, potentially contributing to the recent post-results price drop. Although Q3 2023 saw a remarkable 391% surge in gross profit, it was insufficient to offset declines in the preceding two quarters. Consequently, the gross profit for 9M 2023 contracted by 10.4%, reflecting a gross margin decrease to 28.8%, compared to 41.5% in 9M 2022.
The company reported an operating loss in Q3 2023, marking a 30.3% decline for 9M 2023 due to heightened Selling, General, and Administrative (SG&A) expenses, accounting for almost 17% of revenues in Q3 2023, up from 12.65% in Q3 2022. The operating margin also witnessed a decline, settling at 9.1% in 9M 2023 compared to 16.9% during the same period in 2022.
Nevertheless, despite the operating challenges, Centrus Energy managed to report a net profit in Q3 2023, a notable improvement from a net loss in the corresponding quarter last year. However, the net profits for 9M 2023 show a 9.1% decrease, attributed to the weaker performance in Q2 2023.
The outlook and market multiples
Looking ahead and considering the commencement of HALEU production, I've assumed a consistent net profit trend through Q4 2023, projecting a total net profit of USD 36.3 million for the year. This results in a forward price-to-earnings (P/E) ratio of 22.7x for 2023, slightly surpassing other analysts' estimates and marking an increase from the 21.5x reported previously. This upward trajectory reflects the challenges in net income observed throughout the year.
The trailing twelve months (TTM) GAAP P/E is currently at 16.36x, while it remains lower than the forward P/E, the rapid increase in stock price over recent months has contributed to an escalation in the TTM figure.
Despite the rise in market multiples, Centrus Energy distinguishes itself by maintaining profitability in comparison to other manufacturers in the nuclear energy sector. Among the limited publicly listed companies in this sector, such as BWX Technologies (BWXT), LightBridge Corporation (LTBR), and NuScale Power (SMR), Centrus Energy and BWXT have achieved a commendable level of financial maturity. Even when compared to BWXT, which has a TTM GAAP P/E of 32.3x and a forward GAAP P/E of nearly 30x, Centrus Energy's market valuations remain competitive. This premium on the stock is justified by its extensive history and consistent profits, positioning it favorably to capitalize on the ongoing revival in the nuclear sector.
What lies next for Centrus Energy?
Despite the currently elevated market multiples, I hold a positive outlook for its future. Positioned on the brink of a full year of HALEU production, the company stands to make significant strides in the coming year if all progresses smoothly—an achievement already demonstrated by its successful fuel production.
The company's recent results present a nuanced picture, potentially accounting for the observed price drop upon their release. However, the overall trajectory indicates growing revenues and consistent net profits, which is a positive development. Looking ahead, I anticipate that sustained momentum in the stock will be propelled by operational profits as production continues to stabilize. The enduring perspective on LEU as a sound investment remains unchanged, even amidst short-term fluctuations influenced by updates like the latest one.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in LEU, over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Harmonic Invest's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Harmonic Invest is not a licensed securities dealer, broker or UK investment adviser or investment bank. Harmonic Invest is managed by an individual writer who is not licensed or certified by any institute or regulatory body.