Government Contract Dependence And Nuclear Transition Will Erode Value

Key Takeaways

• Heavy dependence on a small group of clients and evolving global energy trends could create significant revenue uncertainty and threaten future growth.
  
• Advancing competitor technologies, stricter regulations, and rising ESG scrutiny may increase costs, limit expansion, and put long-term profitability at risk.
  
• Unique position as the sole Western HALEU supplier, rising policy support, and shifting market dynamics drive robust long-term growth, pricing power, and revenue stability for Centrus.

Catalysts

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

• Despite a robust backlog and recent growth in nuclear interest, Centrus remains highly dependent on a handful of long-term government and utility customers, and any loss, renegotiation, or deferral of these contracts as global nuclear policy evolves could cause sharp revenue volatility and reduce earnings predictability over the coming decade.
  
• The accelerating global shift toward renewable energy, advancing battery storage technologies, and grid flexibility could ultimately shrink the role of baseload nuclear, undermining long-term uranium enrichment demand and putting Centrus' revenue growth and margin expansion at risk.
  
• Centrus faces a significant technology risk as competitors continue to develop alternative enrichment methods such as laser or advanced gas diffusion technologies; if these or international state-backed entrants reach commercialization, Centrus' multi-billion-dollar investments in centrifuges could become obsolete, resulting in heavy R&D expense with limited returns and compressing future net margins.
  
• Heightened ESG scrutiny and rising institutional pressure could limit the company's access to affordable capital, driving up funding costs or restricting investment, which would impair Centrus' ability to self-fund large expansion projects or weather periods of regulatory uncertainty, negatively impacting future earnings and long-term scalability.
  
• Stricter nuclear regulatory requirements, public opposition to waste and safety issues, and intensifying price competition from global enrichers threaten to raise compliance costs and put downward pressure on contract pricing, eroding Centrus' operating margins and diminishing the impact of recent efficiency gains over the long term.

Centrus Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Centrus Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Centrus Energy's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.0% today to 3.3% in 3 years time.
• The bearish analysts expect earnings to reach $15.2 million (and earnings per share of $0.72) by about August 2028, down from $104.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 190.6x on those 2028 earnings, up from 38.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

Centrus Energy Future Earnings Per Share Growth

Risks

• Increasing policy support and substantial government appropriations, such as the $3.4 billion for domestic nuclear fuel production and major executive orders to quadruple U.S. nuclear output by 2050, create a robust demand pipeline for Centrus's enrichment services, directly supporting multi-decade revenue growth and order visibility.
  
• Centrus's status as the only Western and U.S.-based producer of High-Assay Low-Enriched Uranium (HALEU), with a contractually extended relationship with the DOE and the ability to meet both commercial and national security needs, positions it as an essential supplier and enables high pricing power, which can lift net margins and future earnings.
  
• The rapidly expanding addressable market-driven by public-private partnerships, aggressive state-level nuclear legislation, accelerating private investment from large tech corporations, and growing interest in micro and small modular reactors-underpins recurring and growing revenues, as evidenced by Centrus's $3.6 billion backlog, portioned under long-term and contingent contracts.
  
• Operational execution with improved cost management, strong liquidity (ending Q2 with $833 million in cash), and a focus on scaling manufacturing readiness ahead of large contract awards all support better operating leverage, providing potential for margin expansion as fixed costs are spread over greater production volumes.
  
• Industry-wide trends, including the expected exit of Russian suppliers from Western markets and resulting utility focus on securing non-Russian enrichment, will drive market share to Centrus, supporting long-term revenue stability and mitigating downside financial risk.

Valuation

• The assumed bearish price target for Centrus Energy is $108.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Centrus Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $310.0, and the most bearish reporting a price target of just $108.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $455.0 million, earnings will come to $15.2 million, and it would be trading on a PE ratio of 190.6x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $223.15, the bearish analyst price target of $108.0 is 106.6% lower.
  
• 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.