A New Look at Nuclear

07/30/2004 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

"Nuclear power is making a comeback," says Roger Conrad, editor of Utility Forecaster. "We are now witnessing a second coming for this once-derided power source. Here, we look at the best investment ways to play this resurgence."

"Global competition for energy supplies is heating up. Meanwhile, global warming has also become a threat to national security. A solution to both problems that’s gaining attention is nuclear power, which generates 20% to 22% of the nation’s electricity without producing greenhouse gases. Ironically, as recently as the late 1990s, Wall Street had written off the nation’s 104 working nuclear plants as dinosaurs destined for extinction. Today, US nuclear generation is at all-time highs, thanks to vastly improved operating rates and equipment to boost capacity. For the first time since the 1978 accident at Three Mile Island, utilities and the government are gearing up to build a new generation of US nuclear plants. And other nations are moving even faster. China alone plans to increase its nuclear output fivefold by 2020 and build 30 new plants. Cashing in on the profits from nuclear energy will require patience and a long-term perspective. Here are six stocks that are major owners and operators of US nuclear plants:

Dominion Resources
Southern Company (SO NYSE)
Constellation Energy (CEG NYSE)
Entergy Corp. (ETR NYSE)
Exelon (EXC NYSE)

"All except Southern have acquired nuclear plants in other parts of the country at very low prices, which are now greatly feeding their bottom lines. Exelon has bought throughout the Northeast and Midwest. Entergy and Constellation are major players in New York. Dominion owns the giant Millstone plant in Connecticut, while FPL runs Seabrook, the New Hampshire plant that was opened only after a decade-long battle with activists. All have entered consortia to develop new plants. The six have strong regulated utility businesses, their principal sources of financial strength. Nuclear is likely to become a bigger deal in coming years for the bottom line. But meanwhile, they’re paying out a steadily rising stream of dividends. With interest rates volatile, their stocks could experience some downside in coming months. But all are solid long-term values for those who don’t own them below listed prices: Constellation (buy under 40), Dominion (65), Entergy (55), Exelon (32), FPL (65) and Southern (30).

"We’d also add that there has been a multi-year global shakeout among heavy engineering firms. In the US, General Electric (GE NYSE) has taken the inside track in all things power. Siemens (SI NYSE) occupies a similarly coveted position in Europe. Selling for over 18 times projected 2005 earnings, GE’s only a buy on dips under 30. Siemens rates a buy up to 75. German-based utility conglomerate RWE (RWEOY Other OTC) should be a safe port even if the weather gets rough. We’ve recommended the stock for its water holdings. But RWE is also decommissioning nuclear power plants in Germany. A time-consuming process, this is a steady cash flow stream for the company, and provides invaluable global expertise for when the current fleet of global nukes is shuttered. That’s another reason to add RWE to your portfolio up to 45.

Among higher stakes stocks, we’d add that Japan’s Mitsubishi Heavy Industries (MHVYF Other OTC) is in good shape to garner a goodly portion of the estimated $35 billion China will spend on new nuclear plants. The company already has projects in the country, partnering with other global engineering giants. Shares have been hurt recently by problems at sister company Mitsubishi Motors and weak Asian markets. But Mitsubishi is a buy up to 3 for speculators. In addition, USEC (USEC NASDAQ) is America’s primary supplier of low enriched uranium (LEU) used to run nuclear power plants. It’s also the US government’s exclusive agent for purchasing LEU derived from Russia’s former nuclear weapons stockpile. That puts the company on track to profit both from global growth in peaceful use of the atom and weapons decommissioning. Yielding nearly 7%, USEC is a good buy for the aggressive up to 8.50."

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