Future Revenue May Be Uncertain Despite Substantial Uranium Contracts

Key Takeaways

• Strategic investments in manufacturing and securing DOE contracts position Centrus as a frontrunner in domestic uranium enrichment, boosting future revenue potential.
  
• Optimizing inventory sales amid rising uranium prices and a significant backlog supports positive long-term growth and earnings prospects.
  
• Centrus Energy's strategic DOE contracts, manufacturing investments, and rising uranium prices position it for stable long-term growth and improved profit margins.

Catalysts

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

• The decision to resume centrifuge manufacturing activities and expand manufacturing capacity at the Oak Ridge facility represents a $60 million investment aimed at accelerating time to deployment for new production. This initiative is expected to impact future revenue by positioning Centrus as a first mover in domestic uranium enrichment.
  
• The company secured multiple DOE contract awards for HALEU and LEU enrichment, backed by over $3.4 billion in congressional appropriations. Winning upcoming task orders from these contracts could lead to significant earnings growth through federal investment in domestic nuclear fuel production capacity.
  
• The issuance of $402.5 million of convertible senior notes strengthens Centrus’ capital position, allowing for future strategic investments that could enhance long-term revenue prospects and earnings potential through increased production capacity.
  
• Centrus’ ability to capitalize on rising uranium commodity prices by optimizing its inventory sales strategy indicates potential for improved net margins and revenue in the near future, contingent on commodity market conditions and strategic stock sales.
  
• The substantial backlog of approximately $3.7 billion, including $2 billion in contingent LEU sales commitments, supports a positive outlook for future revenue streams if the company can successfully realize these commitments through new production capabilities.

Centrus Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Centrus Energy's revenue will decrease by 0.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.6% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $34.9 million (and earnings per share of $2.08) by about February 2028, down from $73.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 80.9x on those 2028 earnings, up from 24.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 6.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Centrus Energy Future Earnings Per Share Growth

Risks

• Centrus Energy's backlog of $3.7 billion, extending to 2040, represents significant long-term commitments, potentially providing stability and predictability to future revenues.
  
• The company's successful acquisition of multiple Department of Energy (DOE) contracts and the possibility of future task orders underpinned by over $3.4 billion in congressional appropriations indicate potential for increased revenue and earnings.
  
• Centrus Energy's strategic $60 million investment to enhance manufacturing capabilities may further decrease costs, improve operational efficiency, and bolster profit margins as they prepare for anticipated task orders.
  
• Rising uranium commodity prices and strengthened relationships with suppliers like TENEX give Centrus the opportunity to increase revenue and potentially improve net margins through advantageous spot market sales.
  
• The support from both political parties in the U.S. for domestic nuclear fuel production, combined with the company's position as the sole American company ready to deliver enrichment technology, may support Centrus Energy's long-term revenue growth and earnings stability.

Valuation

• The analysts have a consensus price target of $113.667 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 $154.0, 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 $430.9 million, earnings will come to $34.9 million, and it would be trading on a PE ratio of 80.9x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $108.91, the analyst price target of $113.67 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.