Q's re: article and USEC
MS_Chris wrote in message ...
I have a few questions concerning potential devaluation scenarios:
1) In an attempt to help Russia recover it's economic stability will USEC (although a public company now) be forced to increase the loss leader "Megatons-to-Megawatts" deal with Russia and if so won't this severely hinder profits.
2) What are the safeguards against Lockheed Martin acquiring USEC in a hostile takeover. Thus diluting the potential returns outlined in Mr. Burry's article?
3) Lastly, if AVLIS doesn't work out won't USEC's enrichment plants require a major influx of capital to approach their European competitors?
All in all a good (Income stock) find -- although not as exciting as an internet IPO.
I replied...
1. USEC is not forced to do anything now that its primary fiduciary responsiblity is to its shareholders and not the government. However, it is in the interests of USEC to maintain a stable global uranium and nuclear power trade, and the Russian HEU deal is part and parcel to that stability. USEC cannot be forced to take more than was in the original contract. It is important to note that USEC does not take a loss on this contract. Rather, its services with respect to the contract are simply lower margin. Even so, the current state of affairs is that USEC is a tremendous producer of cash flow even with this weight around its ankle. If an opportunity were to arise to sensibly get out of the contract, the company could benefit tremendously, but this would fall into the camp of unexpectedly good news rather than fulfilment of an expectation or need.
2. Re: Lockheed takeover, from the S-1: "Under the Privatization Act, immediately following the consummation of this Offering, no person, directly or indirectly, may acquire beneficial ownership of securities representing more than ten percent (10%) of the total votes of all outstanding voting securities of the Company for a period of three years. " So a takeover is unlikely and it is probable that in that time the stock will have realized more value for shareholders.
3. The GDP plants are old but durable. In the current state of affairs, USEC could go on for years with them. The European threat is less than it seems - the main competitor actually gets most of its business from European governments by law, and hence USEC is not counting on Europe for current or future cash flows anyway. Again, the current state of affairs - with the Europeans with more advanced technology and with electricity accounting for 53% of operating expense - is that USEC dominates total market share and produces awesome cash flow out of it. That said, AVLIS will likely work and no competitors are anywhere near it. AVLIS' potential to bring electricity usage down 90-95% is completely unaccounted for in the current share price.
That said, the current share price belies the stability in the current situation, as I mentioned in the article - the risk premium being assigned to USEC is to high, and its current dividend alone should warrant a stock price nearer $20, not counting the hidden assets.
The article may have overstated the growth story. The story is stability, cash flow, and undervaluation, with potential for massive margin expansion 5-7 years out, and greater earnings recognition 3 years out when they capitalize AVLIS. Not just an income stock, IMO, and much better than an internet stock, IMO.
Comments welcome,
Mike |
