DOE Contracts And $2 Billion LEU Commitments Will Advance Domestic Enrichment Projects

Key Takeaways

• Federal contracts and investments position Centrus as a domestic leader in nuclear enrichment, boosting potential revenue through government support and strategic manufacturing efforts.
  
• Future earnings are supported by substantial customer commitments and strategic financial moves, improving Centrus' market position and profitability outlook.
  
• Reliance on Russian supplier, government task orders, and investment funding introduces significant risks to supply chain, financial stability, and future revenue predictability.

Catalysts

Supplies nuclear fuel components for the nuclear power industry in the United States, Belgium, Japan, the Netherlands, and internationally.

• Centrus Energy has won multiple contract awards from the Department of Energy (DOE) related to HALEU enrichment and LEU enrichment, which could lead to substantial revenue growth from future task orders. These contracts are part of a larger $3.4 billion federal investment under the Inflation Reduction Act and government funding bills, expected to boost revenue significantly.
  
• The company has begun a $60 million investment to accelerate centrifuge manufacturing activities at its Oak Ridge facility, positioning Centrus as a first-mover in domestic centrifuge production. This investment is anticipated to enhance operational efficiency and revenue generation capacity.
  
• Centrus has secured approximately $2 billion in customer contingent LEU sales commitments, indicating strong future demand for its products. If these commitments convert to actual sales, they could significantly increase the company’s future earnings.
  
• The issuance of $402.5 million in convertible notes has strengthened Centrus' financial position, allowing for strategic investments that may improve long-term revenue and profit margins while reducing financial risk.
  
• Initiatives to tap into investment tax credits related to clean energy manufacturing could provide Centrus with $62.4 million in additional funds, enhancing net margins by reducing effective tax burdens and supporting profitability.

Centrus Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Centrus Energy's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.6% today to 14.3% in 3 years time.
• Analysts expect earnings to reach $79.8 million (and earnings per share of $4.5) by about April 2028, up from $73.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $106.8 million in earnings, and the most bearish expecting $59.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.0x on those 2028 earnings, up from 14.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 4.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.36%, as per the Simply Wall St company report.

Centrus Energy Future Earnings Per Share Growth

Risks

• The dependency on Russian supplier TENEX for enriched uranium and potential disruptions due to export licensing could lead to supply chain issues, impacting revenue consistency and fulfillment of contracts.
  
• The 42-month timeline to bring on a commercial-scale enrichment cascade is heavily contingent on government task orders and funding. Delays or lack of task orders could slow projects and affect anticipated future revenues and earnings.
  
• The convertible senior notes and $60 million investments in manufacturing could increase financial risk if immediate returns are not realized, potentially pressuring net margins and cash flow.
  
• The high volatility and future unpredictability of uranium and SWU prices, along with timing of market opportunities, could lead to variability in revenue and gross profit margins.
  
• The company's significant reliance on obtaining public and private investments to fund its contingent LEU sales commitments introduces risk to future revenues and earnings if sufficient funding is not secured.

Valuation

• The analysts have a consensus price target of $141.743 for Centrus Energy 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 $300.0, and the most bearish reporting a price target of just $61.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $556.0 million, earnings will come to $79.8 million, and it would be trading on a PE ratio of 43.0x, assuming you use a discount rate of 8.4%.
• Given the current share price of $64.91, the analyst price target of $141.74 is 54.2% 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.