Cameco (NYSE:CCJ), shares have been on a tear, and over the past 3-months they’re up nearly 60% alone.
This isn’t a surprise as investors migrate across the AI stack to the power infrastructure opportunities and see Cameco as a prime contender to benefit from surging demand.
Cameco’s Growth
Management just reported a strong Q2 earnings report detailing net income of $321 million and EBITDA growth of 43% year-over-year in its uranium business. Higher sales volumes and realized prices for uranium were the prime driver.
Interestingly, Cameco’s share of Westinghouse, a reactor in which it holds at 49% stake, contributed $126 million in net earnings. The effect of a reactor project in the Czech Republic was viewed as the driving force.
Cameco also revised some of its projections upward for the rest of this year. Of particular note was an upward revision in the expected price it would realize for its uranium from $84 per pound to $87. The Westinghouse investment is also expected to keep paying off, with full-year EBITDA projected to reach somewhere between $525 million and $580 million. This was a sharp upward revision for Westinghouse’s contribution to the overall picture at Cameco, as EBITDA had previously been projected at $355 million to $405 million.
Turning to a longer time horizon, Cameco could have very strong growth catalysts in front of it. A combination of growing demand for power and ongoing pushes to reduce carbon emissions both favor a resurgence of the long-stagnant nuclear energy market.
Between now and 2040, nuclear’s share of the global energy mix is expected to rise from 9 percent to 12 percent as several countries invest more heavily in building additional nuclear reactors. This trend could be bolstered even further by the advent of small modular reactors, which could make nuclear energy more scalable and easier to deploy.
A prime example of the new push for nuclear energy was seen earlier this year, when President Trump signed an executive order aimed at promoting nuclear power domestically. With federal support, new nuclear projects in the United States could see fewer regulatory hurdles going forward. This is just one of many instances of governments turning to nuclear energy in order to meet growing power demands that don’t seem likely to slow down anytime soon.
These trends are expected to produce significant earnings growth for Cameco that could push its share prices steadily higher. Earnings per share are expected to rise at an astonishing rate of 65 percent over the coming 3-5 years, though it’s likely unwise for investors to bank on such a high rate of growth. Even assuming much more modest growth rates, though, CCJ could see its share prices rise considerably as earnings move upward in the coming years.
Is Cameco’s Valuation Justified or Over the Top?
For a mining stock, Cameco has an unusually high valuation of 86.9x earnings, 13.1 times sales, 6.8 times book value and 51.0 times cash flow. Of course, these high multiples reflect the growth opportunities that Cameco could have in front of it as demand for uranium rises. Even so, it’s difficult to make a case that CCJ is actively undervalued at the moment.
CCJ is, however, trading almost exactly in line with the average analyst price target of $78. At $76.55, Cameco is less than 2 percent lower than this average projected price, potentially leaving limited room for immediate upside. Given the kind of growth the business could see over the coming years, though, it’s possible that CCJ is fairly valued even at its currently high price.
One indication that CCJ could be trading at too high a premium, however, may be found in the stock’s recent institutional trading activity. In the last six months, institutional investors have sold about 80 percent more CCJ than they’ve purchased.
This may indicate that large investors are skeptical of the high value multiples that Cameco now commands after doubling over the past year. It’s worth noting, though, that institutional ownership of CCJ remains quite high in spite of this spike in selling.
Is CCJ Stock Overvalued?
There’s little doubt that CCJ is fairly expensive at the moment, particularly for a commodity stock. However, the potential for growth over the coming years shouldn’t be ignored. With more and more nuclear projects likely to come down the line as demand for energy rises, Cameco could be poised for growth well beyond the 5-year mark. The recent results from the Westinghouse acquisition are also quite positive, suggesting that Cameco could see significant long-term accretive value from its investment in buying nearly half of the business.
Cameco also has the advantage of being in a fairly good financial position. As of the end of Q2, the business had $716 million in cash and equivalents and only $1 billion in overall debt. With revenues and earnings currently rising, Cameco appears to be in a solid position to keep growing without undue financial risk.
Like most mining businesses, Cameco does pay a dividend. However, its dividend is paid out only once a year and offers a yield of well below 1 percent. As such, although the distribution adds something to investors’ total returns, CCJ may not be the most appealing choice for income-oriented investors.
While Cameco likely won’t produce the kind of triple-digit returns it has delivered in the last year, the stock may be a good buy today for investors hoping to profit from renewed interest in nuclear energy by buying a stable, established business. With nuclear energy primed for a period of higher investment ahead, CCJ could be a decent stock to buy for future gains despite its fairly high valuation.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.