Re: USEC. Just started trading today - the government privatized its uranium enrichment business in the largest IPO of the year. It did not "pop", so you can still get the same price the big institutuions got.
Mike - Your analysis is exactly like my first cut. Now flip the prospectus over, however painful, and read it again. Look for:
1) Inventories are not as boring as they look. The government has slipped USEC a huge uranium stockpile which is completly unnecessary to the core business. It will be liquidated over about 6 years. Uranium has a market price, noted in the prospectus. Discount it however you want, but I don't see how you can get much less than $7 a share for this asset. (see pp. 59-60)
2) Why have operating earnings been falling for the last 3 years? Its almost all due to an expense on the income statement called "Project Development Costs". The nature of this expense makes me want to set it aside and value the business without it. It looks a lot more like an investment than an expense to me. So if we do that, we've got a business earning $2 a share (nearly all free cash flow), the uranium inventories worth $7-10, and then this investment/money pit.
3) The $150 million project cost I am backing out is the tail end of what looks to me like a government boondogle. The feds have spend nearly $2 billion on this research, which if feasible would cut USEC's costs signficicantly (but would require $1.5 billion to build a new facility). The point is that it is an option. Management is not going to build this plant if it doesn't make financial sense. Options, by definition, cannoth have negative value, so let's just call this zero.
Also, top-notch management from the private sector. An oligopoly where competitors are often barred from each other's markets. And when was the last time you ever saw the government run something efficiently. There have got to be cost-cutting opportunities. Also, when you think about book value, the plants are on the books for nothing becasue the government owns them. But USEC has a sweetheart lease deal in perpetuity. That way below market lease has great value which is not on the balance sheet.
This stock will trade in the mid-20s when the market figures this out, and I get an 8% yield while I'm waiting. |
