Energy Security Concerns Will Drive Demand For Nuclear Fuel And Reactor Builds

Key Takeaways

• Strong market conditions and strategic acquisitions in Europe could drive future revenue growth and earnings for Cameco.
  
• Long-term uranium contracts and facility enhancements are poised to protect against market volatility and improve margins.
  
• Potential U.S. tariffs, production uncertainties, market pressures, and supply risks could threaten Cameco's revenue, profitability, and long-term growth.

Catalysts

Provides uranium for the generation of electricity.

• Cameco expects to benefit from supportive market conditions for nuclear fuel and new reactor builds, driven by energy security concerns and geopolitical factors, potentially increasing future revenue and earnings.
  
• Cameco’s strategic positioning in the Westinghouse acquisition, focused on opportunities in Poland, Bulgaria, Ukraine, and Slovenia, may lead to future growth in earnings as nuclear technology demand increases.
  
• They anticipate a strong pipeline of long-term uranium contracts, which can provide downside protection and enhance margins by reducing exposure to volatile spot markets.
  
• Expansion and optimization projects at their existing facilities, such as McArthur River and Key Lake, aim to enhance operational efficiency and profitability, potentially improving future net margins.
  
• Potential tariff impacts on Canadian uranium exports to the U.S. are being mitigated through strategic contracting and material positioning, protecting revenue streams while possibly benefiting domestic prices if tariffs are enacted.

Cameco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cameco's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 30.4% in 3 years time.
• Analysts expect earnings to reach CA$1.2 billion (and earnings per share of CA$2.65) by about March 2028, up from CA$171.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$1.4 billion in earnings, and the most bearish expecting CA$999 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.0x on those 2028 earnings, down from 160.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Cameco Future Earnings Per Share Growth

Risks

• Potential U.S. tariffs on Canadian energy products, including uranium, could impact Cameco's revenues and profit margins if imposed, despite current strategies to mitigate effects.
  
• Ongoing production uncertainties at the Inkai facility in Kazakhstan, such as supply chain issues and halted production, could affect Cameco's uranium supply, potentially impacting earnings.
  
• Downward pressure on uranium term market prices, particularly floor prices, could challenge revenue growth if spot prices remain low and long-term contracts are insufficient to support expansion.
  
• The potential for competition from recommencing Russian uranium exports could disrupt market dynamics and demand for Cameco's products, affecting long-term revenues and growth.
  
• The significant forthcoming decline in supply due to the depletion of major sources like Cigar Lake emphasizes risks related to eventual supply shortages, impacting future profitability if new investments and projects don't align in time or cost effectively.

Valuation

• The analysts have a consensus price target of CA$84.75 for Cameco based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$92.0, and the most bearish reporting a price target of just CA$76.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$4.0 billion, earnings will come to CA$1.2 billion, and it would be trading on a PE ratio of 37.0x, assuming you use a discount rate of 6.9%.
• Given the current share price of CA$63.51, the analyst price target of CA$84.75 is 25.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.