The demand for electricity rises as global economies continue to improve. However, there has been a migration toward cleaner production methods. Overall, governments are trying to avoid coal power plants due to environmental concerns. Natural gas is the cleanest fuel used for electricity production. Due to an increasing demand for natural gas, prices for the commodity have rebounded after trading at multi-year lows in May 2012. Since electricity production by coal is not favored, due to environmental concerns, and natural gas prices are increasing, it is time to look at nuclear fuel once again.
The uranium miner
A strong uranium supply has been coming from Russia’s nuclear disarmament program. However, it is set to end in 2013. This will induce a significant shortage in the supply, and prices for uranium should rise. Cameco Corporation (USA) (NYSE:CCJ) will benefit from higher prices, and it offers a great investment prospectus to gain exposure to the basic materials sector.
The company trades with a price-to-earnings ratio of 58 and a forward P/E of 16. Its revenue fell 21% to $444 million, and its net income fell from $132 million, or $0.33 per share, to $9 million, or $0.02 per share. However, the company should fare well in the future. The company is a major uranium miner, and it provides uranium fuel to most of the nuclear power plants. The decrease in revenue was partially due to nuclear reactors being shut down in Europe. However, Japan has given hints regarding the restart of several nuclear reactors by providing safety guidelines that must be followed. Electricity is scarce in Japan, and nuclear power is a viable choice for the Japanese government since the country has no fossil fuel resources.
In addition, Cameco Corporation (USA) (NYSE:CCJ) was granted a uranium mining license authorizing construction and operation of the Cigar Lake Project, which is valid until June 30, 2021. This is huge news because the deposit is the world’s second-largest high-grade uranium deposit. The grades are 100 times the world average. As demand for uranium increases, while the supply decreases, Cameco will gain a strategic advantage by being able to produce more uranium to meet the world’s demand.
Electricity generated by nuclear power plants is great
The Southern Company (NYSE:SO) is an electricity provider in four Southeastern states. It has operated nuclear plants safely and reliably for more than 30 years. Currently, six nuclear reactors provide electricity to the grid. The company trades with a P/E of 18.6, compared to the industry’s average of 36.1. The company posted earnings of $97 million, or $0.09 per share, for the first three months ending in March 2013, compared to $384 million, or $0.42 per share, a year ago. It also offers a 4% dividend, which should sit well in an income-oriented portfolio.
The utility company should do well in the near term. Its cash from operations increased 29% to $737 million, and its free cash outflow narrowed by $200 million to $460 million. For this reason, the dividend offer is not in jeopardy. In fact, the dividend payment has been hiked at least once per year since 1987. There is no reason to believe this trend will change.
Lastly, the company is constructing two more nuclear reactors, scheduled to come online in 2017 and 2018. This will position The Southern Company (NYSE:SO) to meet the ever-increasing electricity demand in the region. The company has not had issues regarding the operation of nuclear reactors in the past, and all of the required maintenance has been done on schedule and without incident. In fact, one of its reactions was recently refueled and it did not have issues. This being said, investors should be confident that the company is able to operate nuclear reactors, and that its revenue will continue to increase in the near term.
Exelon Corporation (NYSE:EXC) operates 10 power plants and 17 reactors located in Illinois, Pennsylvania, and New Jersey. The company trades with a P/E of 27.5, while the industry’s average if 23.1. The company posted a 29% increase in revenue to $9.27 billion for the first three months of 2013 compared to last year. However, due to higher expenses, primarily from high nuclear fuel costs, the income resulted in a net loss of $4 million from a profit of $200 million YOY.
On the positive side of things, the summer is expected to be hotter than normal, which will push electricity consumption to higher levels. In addition, investors must remember that 28% of the electricity produced by the company comes from natural gas power plants. The prices for the commodity rebounded from multi-year lows and rallied more than 100%. So, the prices for natural gas were significantly higher in the first quarter of 2013, compared to the same period a year ago.
Prices for natural gas may have stabilized after it traded at its 52-week high in May. This should help Exelon Corporation (NYSE:EXC) maintain low costs of operation. Overall, as demand for electricity increases this summer, the company is in a great position to bring huge revenue by meeting the demand for electricity.
Lastly, investors should pay close attention to the company’s free cash flow in the next earnings report. For the first quarter, the free cash outflow expanded by 15% to $588 million. This is not good news because, ideally, we want to see increasing free cash inflow. If the company’s free cash outflow continues to expand, the stock must be avoided as the risk for a dividend cut will be high.
The foolish message
In conclusion, nuclear power plants are expanding. The Southern Company (NYSE:SO) is building two reactors that are to be inaugurated in 2017 and 2018. Also, a hotter-than-normal summer will spike the demand for electricity, so Southern Company and Exelon Corporation (NYSE:EXC)should do fine. Since the supply from uranium is expected to drop significantly due to the end of the disarmament agreement with Russia, commodity prices are expected to soar.
Cameco Corporation (USA) (NYSE:CCJ) is perfectly positioned to meet the increasing demand at increasing prices, which will be phenomenal. Investors may grab shares of Cameco and The Southern Company (NYSE:SO) to take advantage of this barely-explored market, and their portfolios will experience growth in the interim. I would rank Exelon Corporation (NYSE:EXC) as “hold” because its free cash flow is decreasing. Continuing decreases endanger its dividend payment, and investors punish companies that cut their dividend offers. For this reason, investors should wait for the next earnings report to see how the free cash flow changed, and then reconsider a long possibility in this stock.
As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. This strength, combined with an increased focus on balance sheet health and its recent merger with Constellation, places Exelon and its resized dividend on a short list of the top utilities. To determine if Exelon is a good long-term fit for your portfolio, you’re invited to check out The Motley Fool’s premium research report on the company. Simply click here now for instant access.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Exelon and Southern Company.
The article The Uranium Market Will Soar originally appeared on Fool.com.
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