Can EnergySolutions Power Up With Nuclear Energy?

By Stephen D. Simpson, CFA | April 05, 2011 AAA

Shakespeare may have thought that it was better to try and fail than to never try at all, but Wall Street is seldom so forgiving. While EnergySolutions (NYSE:ES) has a lot going for it as a very rare pure play on nuclear energy services, the company is going through a difficult adjustment. After trying to compete as a tier-1 player, the company looks to be retrenching, and near-term earnings performance is not looking robust. Nevertheless, patient investors may want to keep an eye on this name as there may be more power to the business than near-term results suggest. (For background reading, check out The Biggest Nuclear Operators In The United States.)

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A Tough End to the Year
Due in part to some accounting readjustments, the fourth quarter of this fiscal year was not very strong for EnergySolutions. Revenue was effectively flat, gross profit was down 15%, and EBITDA fell 6%. None of that is likely to impress analysts, even on an adjusted basis.

Looking around on a division basis does not really help the picture much. The company's international business, its largest component, was basically flat on a revenue basis, but operating income fell more than 20% on lower fees from a major contract. Elsewhere, the commercial services business saw revenue jump, but operating income swung to a loss anyway.

Difficult Times Are on the Way
A lot of factors seem to be aligning against the company. While the company's assignment to decommission Exelon's (NYSE:EXC) Zion Station plant should be lucrative in total, the early years of this contract may not be as profitable as investors initially hoped.

Beyond that, it is hard to believe that the Department of Energy is going to see robust budget allocations with the squabbling in Washington and the wrangling over budget deficits and the national debt.

EnergySolutions may also see near-term turbulence due to its decision to move away from tier-1 projects and reposition itself as a tier-2 player. What that means is that the company will be competing less against major engineering concerns like URS (NYSE:URS), Shaw (NYSE:SHAW), Fluor (NYSE:FLR) and Babock & Wilcox (NYSE:BWC) on a head-to-head basis, and instead will be looking to be partners (act as a subcontractor) when they can contribute their nuclear material handling expertise in areas like spent fuel management, decontamination, decommissioning and waste disposal.

But Better News Could Come in Time
Despite that negative backdrop, EnergySolutions could still be a worth a look. The company owns its own low-level radioactive waste facility and that is not the sort of thing that a competitor can just open up wherever they want on short notice. Consequently, that offers some margin leverage to the story.

It is also worth noting that there is more work to be done on nuclear plants that have already shut down, not to mention the potential for decommissionings in the future. There are several plants around the country getting up there in age and the recent disaster in Japan may make it harder for utilities like Entergy (NYSE:ETR) and Dominion (NYSE:D) to get license extensions.

Moreover, there is scarcity value to this story. There just are not that many companies out there with broad experience and capabilities in nuclear cleanup and waste management. Whether that makes them a buyout target or not, it suggests that the company's move to tier-2 subcontractor status could pay off down the road as larger companies look to EnergySolutions for expertise.

The Bottom Line
Thursday's earnings report is not likely to be well received by the market, and there is probably no need to rush to buy these shares. Either way, though, it seems likely that there will be healthy demand for the company's services in the coming years - either as countries turn to nuclear power as a cleaner energy source, or they abandon nuclear power generation and work to clean up its legacy.

As investors in other clean-up companies like Clean Harbors (NYSE:CLH) and US Ecology (Nasdaq:ECOL) can attest, though, while the rewards for success in this field can be significant, it can take time for the stories to work and patience is a must. (For related reading, take a look at Forget Green Stocks, "Green" Will Do.)

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