Cameco Corporation’s (TSE:CCO) Sustainability In Question?

Cameco Corporation (TSX:CCO) has been on my radar for a while, and my main concern is around the sustainability of the business going forward. Though its financial status seems robust, the market seems extremely bullish on a doesn’t seem to justify the current share price of CA$11.58, and here’s why.

First, a short introduction to the company is in order. Cameco Corporation produces and sells uranium worldwide. Started in 1987, it operates in Canada and is recently valued at CA$4.58B.

With falling revenues (year-on-year growth rate of -11.29%) I decided to dig a bit deeper into whether this was a one-off occurrence. A consensus of 13 CA oil, gas and consumable fuels analysts covering the stock indicates the future doesn’t look much better. Looking at their predictions, CCO’s revenue level is estimated to decline by -15.96% by 2021. As CCO is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -CA$204.94M to CA$119.44M.

TSX:CCO Future Profit Mar 29th 18
TSX:CCO Future Profit Mar 29th 18

Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health – a strong indicator of an investment’s risk. Cameco’s balance sheet is robust, with high levels of cash generated from its core operating activities relative to 0.4x debt. Generally, anything above a fifth of debt is considered prudent because the company is making enough money to pay down its debt principal over time. Furthermore, CCO’s debt level is at an appropriate 30.75% of equity, though it has been increasing over the past five years from 27.51%. One red flag is that its EBIT was not able to sufficiently cover its interest payment, with a cover of 2.4x. This is a short-term issue, and not the be-all-and-end-all for CCO. Overall, the company shows the ability to manage its capital requirements well, which somwehat alleviates my doubts around the sustainability of the business going forward. CCO has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. CCO has managed its cash well at a current level of CA$591.62M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

The current share price for CCO is CA$11.58. With 395.79 million shares, that’s a CA$4.58B market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 0.94x vs. the industry average of 1.03x.

CCO’s strong capital management isn’t enticing enough of an investment thesis for me. I’m not a fan of its outlook, and the possibility that it is overvalued right now. As above, with my limited resources, I would rather invest in a great business than an average one. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.