Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Daniel Chisholm who wrote (8112)	9/1/1999 1:49:00 AM
From: James Clarke	Respond to of 78822

Dan, I am going to respond to your USEC questions on the value thread. Call it a one-year checkup of a stock I advocated hard last July. (newcomers will find an informative discussion of this stock on the Value thread mid-July 1998 that will get you up to speed.) Dan's questions are good ones, and while I wouldn't call this an unmitigated disaster (I purchased it at the IPO price of $14 1/4, and it is around 11 now. I have collected about $1 of dividends in the last year. I've seen worse, but clearly I am disappointed so far. At around $11, with a dividend of $1.10 and free cash flow of $1.80 this is one that value investors may want to take another look at. The story has deteriorated in that last year, no question about it. But its major elements are intact. And the price is 25% lower. The questions below in the <<...>>'s are Dan's from the USEC thread. ******* Good questions. Bottom line - I have not sold a share of stock from my original purchase. Probably the best way to address your questions is point by point. <<I don't understand. I thought that the Russian contract ("Megatons to Megawatts") was more of a public service obligation that USEC had to perform; they made some small amount money on it, but on strictly commercial terms they would probably not have taken on the business. I though I recall it being previously stated that if they were to lose the Russian contract, they would be better off for it. Since the Russian processing contract is fixed price, where is the damage to USEC being done? Or is it fixed price in the sense that USEC agreed to pay the Russians a fixed price for the feedstock, a price that now looks to be quite high?>> Essentially USEC contracted with the U.S. and Russian governments to buy large quantities of enriched uranium from Russia and resell them to their customers. This allows USEC to control a potentially destabilizing quantity of supply. The price they pay (they are basically a middleman) is not related to the price they can sell it for in the free market (the risk is obvious). That price has been falling. It is still profitable because USEC's contracts are very long term and well above market, but there is no way they would agree to these prices today. They are trying to renegotiate this deal and make it a cost-plus kind of contract. No guarantee they can get out of the contract. Look for something to happen here by year end. <<I really don't care about quarterly volatility or timing of shipments, what I'd like to know is whether the original story is intact. The original story being, of course, that they are a profitable company engaged in a business that has natural barriers to entry and whose services will continue to be required for a good long time, in addition to them possessing significant non-operating assets (inventories) that can be liquidated over the course of 5-7 years, as well as recent earnings figures being artificially understated due to nonrecurring R&D (AVLIS) expenses.>> As you describe it there, the original story is intact. The company produced about $180 million of free cash flow after interest payments and capital expenditures (before dividends) in the last 12 months. And that's with about $60 million after tax of AVLIS development expenses that are going to go away. That on a market cap of $1.1 billion today. On top of that, they have about $5 a share in uranium inventories on the side which they will gradually liquidate into cash. The company is buying back shares aggressively. <<So is USEC still a rich cash cow with generous liquidateable (?? ;-) nonoperating assets, or is it an ugly commodity processor competing with pseudogovernmental non-profit-driven entities (French and Russian)?>> Here I'd have to say its both. When I bought this stock a year ago at 14 1/4 I thought I was looking at much more of the former than the latter, but I have to admit my perception has shifted more toward what you call "ugly commodity..." This is not a paper stock though. It is much more interesting - both on the upside and the downside simply because of what the product is. Enriched uranium is nasty stuff and it is not hard to produce a scary bear case here. Bottom line one-year check-up. I was wrong on the stability of pricing in the business and thus underestimated the risks. I also underestimated just how uncomfortable it can be to own such a strange and dangerous looking business. The question "who is going to pay up for this stock" is one that has to be asked. The "bad news flow" has been like water torture - one thing after another. But the reason I bought it stands - and now looks even more compelling at the lower valuation. I don't think you will find another stock on the market with a free cash flow yield north of 15% and hidden assets making up 40% of the stock price. At the current price, the stock yields over 10%, and I would be shocked if that were cut in the foreseeable future (say 2 years). I watch this one carefully, but have no intention of selling given what I know at this point in time. I may have even talked myself into buying a few more shares tomorrow. JJC