Chinese Growth Supports the Nuclear Industry
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
China has recently announced the approval of a number of nuclear power plants. As the Fukushima disaster fades into history the economics of today's energy world returns. With their growing energy needs and desire to decrease the negative effects of a coal dependent electricity grid, nuclear energy will play an important role in China. Investing in nuclear energy requires a very long term outlook. With cheap natural gas throughout North America it is doubtful that the U.S. would ever go the path of the French and use nuclear energy to provide over 75% of electricity generation. As the developing world continues to see an increase in energy needs nuclear energy will have a part to play. Countries like France which do not want to experiment with fracking or do not wish to increase their use of coal find nuclear energy to be an attractive alternative.
How to Invest
Many firms involved in the nuclear industry have significant operations in other areas of the energy sector. This can be both a blessing and a curse. It helps provides diversification and stability for the companies, but it also makes it difficult for investors to get specific exposure to the industry. Uranium miners are more focused nuclear plays while general infrastructure firms are more diversified.
Global X Uranium ETF (NYSEMKT: URA) is an investment vehicle for those looking for intentional exposure to a number of uranium miners. The fund has only 21 holdings. The concentrated nature of the market is very obvious, as the top five holdings comprise more than 50% of the assets. The expense ratio is .69%, relatively high for an ETF. With an average price to book ratio of .61 and ROE of -5.21%, this is definitely a more speculative investment.
Cameco (NYSE: CCJ) is the largest holding of URA, as it comprises 18.35% of net assets. This Canadian firm has high quality assets in Saskatchewan, Canada which help to give it a gross margin of 48.10% and a profit margin of 18.10%. This company offers one of the best ways to gain direct exposure to the nuclear industry through a mature and profitable company. With a low total debt to equity ratio of .20, the firm has a strong capital structure to complement its profitable assets.
Infrastructure Firms & Engineering Firms
General Electric (NYSE: GE) is one of the world's most famous conglomerates. Though infrastructure related products play a major part of their portfolio, nuclear energy is a relatively small part. Others have estimated that the GE Hitachi joint venture contributes around .7% of 2011 revenues. GE is involved in other parts of the energy market like recently redesigned natural gas turbines which can power up and power down more effectively, thus allowing the base load generation to more effectively work with volatile renewable resources. Given the risks involved with the nuclear energy and volatility which nuclear miners face, a more diversified firm like GE offers some exposure to the nuclear in a more stable package. Currently they are marketing a new generation IV reactor and the UK has expressed some interest. With a gross margin of 57.20%, a profit margin of 9.30%, and a PE ratio of 16.6, the firm is definitely profitable. This is close to the long term average PE ratio of 15, but given GE's broad exposure to the U.S. economy their future ability to maintain earnings should be taken with a grain of salt as corporate profits as whole appear overly optimistic on a long run basis.
Fluor (NYSE: FLR) is a much smaller infrastructure play. With a $9.2 billion market cap it comes in at less than 5% of GE's size. They recently started to work with GE's nuclear division to help to with the development of Polish nuclear energy infrastructure. In the U.S. the firm is working on the decommissioning of a gaseous diffusion facility. FLR is very different from GE and their gross margin of 5.50% and profit margin of 2.4% show this. Regardless FLR boasts a low total debt to equity ratio of .15 and a similar PE ratio of 15.7.
The Babcock & Wilcox Company (NYSE: BWC) is another engineering firm with interests in the nuclear market. They manufacture parts for nuclear plants and provide ongoing services to operators of nuclear facilities. BWC's nuclear related actives are around 60% of the firm's 2013 backlog. Their gross margin is currently 29.80% and their profit margin is 7.10% while they have no debt. As with GE there are strong advantages to investing a firm which provides parts and services to the nuclear industry. Even in the face of a nuclear disaster the long lead time for new power generation facilities means that nuclear plants will not be replaced overnight. BWC's PE ratio of 13.5 is reasonable.
Nuclear energy is a powerful resource and the recent Chinese decision to continue the development of their nuclear plants is a positive sign for the industry. CCJ is a profitable uranium miner with high quality assets and they provide a great way to gain direct exposure to the industry. Those looking for a more balanced approach should consider firms like GE, FLR, or BWC, as these firms are not 100% dependent upon the nuclear energy.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Fluor and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.