Should You Buy Cameco Corporation (NYSE:CCJ)?

Cameco Corporation (NYSE:CCJ) is a company I've been following for a while, and my main concern is around the sustainability of the business going forward. Although CCJ seems to be managing its financials well, and appears to be currently undervalued, meaning we can buy its shares at a good price, I would rather buy an outstanding business at an OK price. My problem is, CCJ doesn't seem to be an outstanding business, and here's why.

Firstly, a quick intro on the company - Cameco Corporation produces and sells uranium worldwide. Founded in 1987, it currently operates in Canada at a market cap of US$4.51B.

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 11 US oil, gas and consumable fuels analysts covering the stock indicates the future doesn't look much better. According to their forecast, CCJ's revenue level is expected to reduce by -13.88% by 2021. As CCJ is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -CA$132.09M to CA$132.41M.

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 0.59x 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, CCJ's debt level is at an appropriate 30.38% of equity, though it has been increasing over the past five years from 27.32%. One red flag is that its EBIT was not able to sufficiently cover its interest payment, with a cover of 2.87x. This is a short-term issue, and not the be-all-and-end-all for CCJ. 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. CCJ has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. CCJ has managed its cash well at a current level of CA$812.52M. 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.

CCJ currently trades at US$11.38 per share. With 395.79 million shares, that's a US$4.51B 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 1.18x vs. the industry average of 1.52x.

CCJ checks a few boxes for me - it has strong capital management and it seems to be undervalued intrinsically. But I'm not a fan of its future outlook. Like above, I would rather invest in a company that checks all the boxes - an outstanding business - than a mediocre 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.