The nuclear crisis in Japan has been an eye-opener to most of us, showing the consequences of a nuclear explosion or leak. It's possible that, like the past quarter-century, the U.S. will make no new investment in nuclear infrastructure thanks to the Japanese situation. Yet with all due respect, to blindly condemn nuclear power and stop generation of electricity from it is going a bit overboard.
Can't stop this power
Nuclear energy as an alternative source of energy is fast gaining importance the world over, especially in the emerging markets. In the U.S. alone, generation of electricity from nuclear power constituted more than 20% of the total electrical output. That number is expected to increase rapidly in the coming decades. According to the World Nuclear Association, more than 45 countries are actively considering nuclear power programs. These range from sophisticated economies to developing nations.
For these reasons, I'll shed some light onto a company that supplies nuclear fuel in the form of low enriched uranium to commercial nuclear power plants in the United States and internationally: United States Enrichment Corp. (NYSE: USU).
What is it?
Created as a government corporation in the early 1990s, USEC was privatized in 1998. The company operates the only U.S.-owned uranium-enrichment facility in the United States and supplies more than half of the U.S. market with uranium-enriched fuel. In addition to the basic segment of fuel supply, the company also recycles bomb-grade uranium from dismantled nuclear warheads into low enriched uranium and has developed a highly efficient uranium-enrichment gas-centrifuge technology that will ultimately be used to produce low enriched uranium. Essentially, with the exception of mineral extraction, USEC stands to become a vertically integrated nuclear fuel company.
The finances
Over the past five years, the company has put together a relatively unimpressive 5.5% annual revenue growth rate, signaling a mature market position and, therefore, providing significant doubt as to whether this is an acceptable entity for investment.
Gross margins for the company stood at 7.9% for fiscal 2010 while the corresponding net margin was a paltry 0.4%. It is also important to note that there was a negative free cash flow of $167.3 million for the same year.
The current ratio is 1.8 times, just above a minimum acceptable 1.3 times. The company has just about enough liquidity to carry out its daily operations. The company's return on equity has kept falling over the past five years -- from 11.2% in 2006 to a dismal 0.6% in 2010. In short, the company's ability to provide decent returns to its investors has fallen.
However, the competition is even. Cameco (NYSE: CCJ) and France-based Areva are the closest competitors. While Cameo has a modest segment in refining and enrichment, Areva is vast. There is hardly any other competition in this sector.
In the long run
Overall, the company has an unimpressive track record. Yet I must mention that the centrifuge project, which is slated to begin initial commercial operations in 24 months under the current schedule, does appear impressive. USEC claims that the centrifuge plant's capacity will be approximately 20% of the U.S. electricity supply today. With nuclear power cheaper than conventional power and fossil fuels incapable of meeting the world's energy demand in the long run, this will be a boon to the company since this could ensure a larger customer base.
Yet much remains to be seen. All nuclear stocks fell this week. Cameco, Uranium Resources (Nasdaq: URRE), Uranerz Energy (AMEX: URZ), and Uranium Energy (AMEX: UEC) fell. A review of the safety of nuclear power plants can be expected, and this may continue for an extended period of time. There is a long way to go, but as of now it would be more Foolish to wait and watch.
