When you think of the next generation of energy, what's the first thing that comes to mind?
If you said anything but advanced nuclear power, you might be surprised to learn that nuclear is back in the conversation. And Centrus Energy (LEU 13.97%) is one of the few U.S. players sitting in the middle of it.
Indeed, this nuclear energy company is the only U.S.-owned enricher licensed to make high-assay low-enriched uranium (HALEU) -- aka the fuel that most next generation nuclear reactors will need.
The growth stock is up a whopping 200% year to date, but has fallen 10% since midsummer highs. Is it a buy today? Let's take a look.
What Centrus is selling and why it matters
As mentioned above, Centrus Energy currently holds the only license in the U.S. to make HALEU. But if you read that and thought "so what," here's some context to help draw out the significance.
Currently, U.S. commercial reactors use fuel enriched to under 5% U-235, which is enough to sustain a controlled chain reaction for power generation. The next generation of advanced reactors, however -- like small modular reactors, or SMRs -- are being designed to run on HALEU fuel, which is enriched between 5% and 19.75% U-235. Since Centrus Energy is the only U.S.-owned nuclear company with a license to enrich above 5%, it's also the only supplier in the U.S. for that fuel.
Image source: Getty Images.
That first-mover advantage is a big reason Centrus has a contract with the U.S. Department of Energy, which recognizes the importance of producing HALEU on home turf.
A strong second quarter and fortress balance sheet
As a nuclear energy supplier, Centrus Energy makes money in two ways. The first is by selling low-enriched uranium (LEU) to reactors. The second is by selling technical services to the government and companies in the private sector.
In the second quarter, revenue from its technical solutions segment surged almost 50%, from $19.4 to $28.8 million. Much of this growth was due to the Phase 2 completion of its HALEU demonstration for the Department of Energy, which saw the successful delivery of 900 kilograms of HALEU fuel.
Meanwhile, revenue in its LEU segment sagged about 26% (from $169.9 to $125.7 million), but gross profit in the same segment climbed 54%, as higher pricing and a richer mix of contracts helped make up for that top-line loss.
On the balance sheet, Centrus had about $833 million in cash at the end of June. And although it had significantly more near-term debt than in recent years (about $483.2 million), it also has positive cash flow and ample cash to cover near-term maturities.
So, is Centrus Energy a buy?
One of the most compelling arguments in favor of a Centrus Energy investment is the U.S.'s push for a domestic nuclear fuel supply chain.
Simply put, the U.S. Department of Energy has been bullish on the prospects of nuclear energy, even going so far as to call it "America's work horse" on its website. Washington is prepared to spend big to create a domestic supply of enriched uranium, and Centrus, as the only U.S.-owned enricher of HALEU fuel, is positioned to be a prime beneficiary.
The advent of small modular reactors (SMRs) is another potential tailwind worth mentioning.
SMRs are a novel nuclear design that takes up less space than other green energy sources (like wind farms, solar panels, and traditional nuclear plants) and can be built pretty much anywhere, making them useful in remote areas. This also makes them an attractive power source for energy-hungry data centers that need reliable 24/7 power.
Most SMRs are being designed to run on HALEU, which is Centrus' future bread and butter. Given that the SMR market is expected to surge from $159.4 million in 2024 to $5.17 billion by 2035, Centrus could see explosive top- and bottom-line growth as SMR operators lock in contracts for its fuel.
Truth is, SMRs aren't commercially operating in the U.S. yet. And although some projects are underway, the technology is still unproven on a large scale and waits to be tested in real-life scenarios. By the same token, there are currently no reactors using HALEU fuel: it's only use right now for energy purposes is to test advanced reactors.
Still, even without the SMR tailwind, Centrus' unique supplier status in the U.S., coupled with the expected demand for its fuel and service, makes it a compelling speculative play. Risk-tolerant investors who believe in the future of nuclear energy might want to open a position before Centrus grows into a much larger enterprise. Those who would prefer to wait before SMR technology advances might want to check out a nuclear energy exchange-traded fund (ETF) instead.
