USEC Inc. (USU): 2008 earnings still on track, longer-term outlook remains cloudy - Goldman Sachs - May 01, 2008
What's changed
USEC reported 1Q2008 EPS of $0.04 versus our estimate of $0.06 and consensus of $0.08. The difference versus our forecast was primarily driven by the timing of deliveries, and we are maintaining our 2008 full year EPS estimate of $0.32, which now assumes a slightly more back-half weighting. While we remain comfortable with the 2008 earnings outlook, management appears much less optimistic of completing debt financing by year-end 2008 or early 2009. Accordingly, we see elevated risk that capital constraints could slow the ACP development timeline.
Implications
Although we believe USEC is in a strong position for the DOE loan guarantee program, timing now looks as if it could slip much later into 2009 than we originally anticipated. Given the uncertainty, USEC is exploring alternative spending profiles to preserve more near-term liquidity. While prudent, we believe this increases the risk that the completion of ACP could ultimately slip beyond the mid-2012 target, particularly given a project timeline that is already tight to begin with. The ACP completion date is an important parameter not only for earnings, but also competitive position, as we believe industry supply/demand must also support a second phase in order for USEC to earn acceptable returns.
Valuation
We are maintaining our Neutral rating, but reducing our 12-month price to $5.50 from $6.50 as we adjust our discount rate to reflect higher risk. Our valuation is based on scenario analysis and DCF; supported by normalized earnings. Our valuation assumes no conversion of convertible debt given the $11.96 strike price.
Key risks
1) ACP performance/cost/timing could differ significantly from our current expectations, driving upside/downside risks;
2) Early termination of the Russian Suspension Agreement;
3) Competitor capacity additions. |
