USEC Inc. (USU), the uranium provider, has surprised on estimates 3 out of the last 4 quarters by an average of 62.38%. The company is cheap, trading at only 4.9x forward earnings.

Company Description

USEC is a supplier of enriched uranium fuel for commercial nuclear power plants worldwide. The company operates the only uranium enrichment facility in the United States and supplies half of the U.S. market and a quarter of the world market with enriched uranium.

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On Feb 5, the company provided an update regarding its efforts to finance and build the American Centrifuge Plant (ACP) in Piketon, Ohio. The uranium enrichment facility has been under construction for 2 years.

USEC applied for a loan from the Department of Energy in Aug 2008 to complete construction but the DOE has yet to respond. Therefore, USEC is taking steps to conserve cash and scale back the project’s construction schedule.

USEC Surprised on Third Quarter Estimates by 200%

On Nov 4, USEC reported third-quarter 2008 results that surprised on Wall Street estimates by 200%, or 4 cents per share. Net income was $8.4 million, or 6 cents per fully diluted share. This was lower than third quarter 2007 net income of $45.6 million, or 51 cents per share. Analysts expected only 2 cents per share.

The lower net income was not a surprise as the company anticipated a decline in separative work unit (SWU) volume compared to 2007 due to the timing of customer refueling cycles.

USEC’s customers have reactors that are refueled on an 18-24 month cycle. Volumes were high in 2007 and the company therefore anticipated a 20% decline in SWU sales volumes as a result in 2008.

Because of the cycle, the company is anticipating a return to 2007 levels in 2009. Year-over-year comparisons of financial results are therefore more problematic.

Revenue also declined 7% to $590.4 million from the year ago period. Revenue from the sale of SWU grew to $490.4 million from $483.5 million in 2007. Volume of SWU sales declined 2% but average prices increased 3%.

Revenue from uranium sales fell to $49.2 million from $53 million. Government contract revenue was basically unchanged at $50.8 million.

Cash Position

As of Sep 30, 2008, USEC had $358.6 million cash on hand, compared to $503.8 million as of the end of the second quarter, June 30, 2008.

2008 Outlook

On Feb 5, the company pre-announced 2008 earnings that were better than previous forecasts. Revenue was $1.6 billion, which was equal to the prior guidance. However, net income was $49 million for the year, higher than the forecasted range of $25 million to $40 million.

The fourth-quarter earnings release will provide 2009 guidance but, as USEC has stated previously, 2009′s financials should show significant improvement over 2008 due to increased deliveries of low enriched uranium to customers at higher average prices.

Consensus Estimates Rise for 2009

Consensus estimates have been rising in the last week given the bullish pre-announcement of 2008 earnings. Fourth quarter 2008 consensus estimates are up 5 cents to 12 cents in the last 7 days. 2008 full-year consensus estimates rose 4 cents to 29 cents.

Covering analysts are also bullish on 2009, as the consensus jumped 4 cents to 73 cents. Analysts expect 2009 year-over-year earnings growth of 152%.

USEC is scheduled to report fourth-quarter and full-year 2008 earnings on Feb 23.

Value Fundamentals

USEC is a Zacks #1 Rank (strong buy) stock. It has a forward P/E of only 4.86. Its price-to-book is 0.47. The company also has a low PEG ratio of only 0.76.

Content Courtesy: Zacks Investment Research

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