EnergySolutions (ES: NYSE)
By Wedbush Securities ($ 4.96, June 2, 2011)

We are downgrading EnergySolutions to Neutral from Outperform as catalysts underlying our investment thesis have not played out and timing of core business recovery remains uncertain.

Our downgrade of shares of EnergySolutions (ticker: ES) is predicated on the following: I) the shift in the operational strategy from being a Tier I to Tier I minority/Tier II player has not generated the contract award or financial results that we had originally anticipated; II) despite the extension of the Magnox [a London-based nuclear power company] contract, albeit a low-margin business, sustainable earnings power in the international segment (now part of Global Commercial Group) beyond 2014 to 2015 remains challenged; III) lower Department of Energy spending, challenged budgets, and renewed concerns about the safety of nuclear energy have cast greater uncertainty on the outlook of the nuclear sector; IV) although fiscal 2011 has been deemed to be a “base-building” year, fiscal 2012 growth is now likely muted; and (V) the risk-reward profile at current valuations is Neutral given the lack of near-term catalysts.

Accordingly, we believe shares of the company are likely to remain range-bound over the next 12 months until visibility improves or incremental catalysts emerge.

The Department of Energy’s $ 417 million Advanced Mixed Waste Treatment Project (AMWTP) contract was a much needed, albeit small win. While joint-venture income contribution is estimated to be $ 1 million per annum, the AMWTP contract award was an incremental positive for EnergySolutions.

However, the timing of additional Department of Energy contract awards remains challenged given the reduction in the Department of Energy spending and budget concerns. Additionally, the transition to a Tier I minority contractor from Tier I prime, while still underway, has not garnered the contract awards and the prolonged Tier II sales cycles are pressuring EnergySolutions’ ability to grow operating results.

Fiscal 2011 and 2012 estimates remain unchanged although growth in fiscal 2012 will likely be muted. While our estimates remain unchanged, our industry checks lead us to believe that fiscal 2012 is now unlikely to exhibit substantial growth from fiscal 2011 levels.

We are lowering our price target to $ 5.50 from $ 7.50. Our price target is derived by applying a six times multiple to our fiscal 2012 adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) estimate of $ 157.5 million.

Our six times multiple reflects a midcycle multiple to account for uncertainty on the timing of new project activity in the Government group, Zion nuclear power plant [in Zion, Ill.] decommissioning estimates, and revenue mix.

— Al Kaschalk
— Kevin Lee

The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.

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