Uranium producer Cameco (CCJ +0.64%) has a strong history. However, the current stock price is in uncharted territory. The stock is trading very close to its all-time high of roughly $124 per share. Should you jump in while it is trading just under that price? Here are some things to consider before making your final investment decision.
What does Cameco do?
Cameco is tied at the hip to the nuclear power industry. However, the company doesn't produce power; it is an industry supplier. Historically, it has mined for and processed uranium. It still does this, but it recently bought half of Westinghouse, which provides services to the nuclear power industry. Still, as Cameco stands today, it is a pick-and-shovels play on nuclear power.
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Westinghouse is a fairly reliable cash-flow generator. Mining for uranium, on the other hand, has a history of being a volatile business. Uranium is a commodity, and its price rises and falls based on supply and demand dynamics in the industry. Cameco tends to use long-term contracts to help protect its cash flows from commodity swings, but there's no way to completely avoid the impact.
Right now, nuclear power is in high demand due to rising electricity demand driven by technologies like artificial intelligence and electric vehicles. That has investors excited about the uranium sector. However, nuclear power has fallen out of favor before, typically after reactor meltdowns. The last such meltdown was Fukushima in 2011, following which uranium prices tanked. Not shockingly, Cameco's stock price fell dramatically, as well.
There may not be enough uranium to go around
The simple story here is that more demand for nuclear power will lead to more reactors being built. More reactors mean more customers for Cameco's uranium. That alone could be seen as a positive. But remember that uranium is a commodity. The growing demand for nuclear power is the demand side of the supply/demand equation. Something interesting is also happening on the supply side.
Cameco estimates that by 2030, there is going to be a small gap between supply and demand. That gap is going to grow over time, even with the currently planned investment in the industry's production. The gap, if demand trends remain the same, could grow into a Grand Canyon-sized chasm. In that scenario, uranium prices would likely skyrocket.
NYSE: CCJ
Key Data Points
Wall Street tends to be forward-looking, so this outlook is getting priced into Cameco's stock price today. Over the past five years, the company's stock price has risen by more than 800%. At the current price, Cameco's price-to-sales ratio is 21, compared to a five-year average of around 8. Its price-to-book value ratio is 10.8, compared to a longer-term average of 3.1. Both of these metrics suggest the stock is expensive today.
That said, the go-to valuation metric is normally the price-to-earnings ratio. Cameco doesn't have a five-year average for this metric because of losses in that span. However, the current P/E ratio of 140 is shockingly high on an absolute basis.
Should you buy Cameco today?
If you are wondering if you should buy Cameco today, the answer is, unfortunately, it depends. The stock looks expensive, so anyone with a value bent will likely want to avoid it. However, if the supply/demand dynamics unfold as expected, there could be material upside to the company's sales and earnings.
That said, in order to buy Cameco today while it is hovering near all-time highs and trading with what appears to be a very high valuation, you need to believe that Wall Street is not already fully pricing in the long-term opportunity.
