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BY Jonathan Heller , On Friday October 21, 2011, 10:00 am EDT
Continuing on the theme of Wednesday’s column, it has been a very rough time for small nuclear power-related names since Japan’s Fukushima disaster. But in the case of EnergySolutions (ES), which is down about 50% since Japan’s earthquake, much of the damage to the stock predates Fukushima. Back in mid-2008, this was a $ 27 stock; with shares now trading under $ 3.50, this stock nearly qualifies as a reverse ten-bagger. I’ve owned this stock in the past, but it’s been off of my radar recently. Then, earlier this week at the Value Investing Congress in New York, Tim Hartch of Brown Brothers Harriman presented a fairly compelling bullish case for the stock. The company is not without its share of warts, but what potential value play isn’t?
If USEC (USU) is at the front end of the nuclear power cycle, providing uranium-enriched fuel, then EnergySolutions is at the back end. The company processes and disposes spent nuclear fuel, and provides in-plant support, decontamination and decommissioning services. That’s an ugly business, but one that is necessary.
The company is already a huge presence in the industry, with life-of-plant contracts at 84 of the 104 operating U.S. reactors. This work primarily involves the disposal of low-level radioactive waste, and the company owns treatment and disposal facilities in Clive, Utah, as well as several materials processing and packaging sites, waste processing operations and maintenance facilities.
As long as nuclear power plants are running, and even as others are being decommissioned, there should be plenty of opportunities for the company. If Germany actually goes through with its plans to shut down all of its nuclear power plants by 2022, those plants will need to be decommissioned. There are no guarantees that EnergySolutions would get any of that business, but it is a major name in the space, and it already generates a great deal of revenue internationally. In the U.K., for instance, the company manages 10 sites comprising 22 reactors for the U.K. Nuclear Decommissioning Authority. Here at home, there are 13 reactors that are already closed, and several more scheduled for closure in the coming years.
Now for the warts. One of the major risks with EnergySolutions is its balance sheet. The company ended its second quarter with $ 53.6 million in cash, but nearly $ 840 million in debt, perhaps not surprising given the capital-intensive nature of this business. But this is also not your run-of-the mill balance sheet; there are several nuclear decommissioning-related assets and liabilities, including trust fund investments. It’s a bit more complicated than most.
EnergySolutions is currently profitable, and trades at about 26x trailing earnings and 10x 2012 consensus estimates. For his part, Hartch believes shares are worth at least $ 8.
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