This Nuclear Story Is Ready to Mushroom

01/10/2012 10:00 am EST

Focus: STOCKS

Marc Gerstein

Editor, Forbes Low-Priced Stock Report

Although the Japanese nuke tragedy has chilled some countries on nuclear power, there are plenty of nukes being built and a lot of workers that are going to need training, writes Marc Gerstein of Forbes Low-Priced Stock Report.

GSE Systems (GVP) is the leader, with a market share of about 60%, in training simulators for nuclear power-plant personnel,. That can be hard for many to swallow in light of widespread general aversion to nuclear power, which intensified after Japan's Fukushima Daiichi nuclear facility was beset by crisis earlier this year.

As a result of the latter, nuclear projects worldwide have been delayed pending further regulatory review, and Germany is now phasing its way out of nuclear power. On the other hand, in One Up on Wall Street, Peter Lynch offers a “disagreeable” business as one of the elements of a perfect stock.

So let’s look at GSE, especially given that this debt-free company has 93 cents per share in cash (a lot considering the shares trade just above $2) and a stock that sells for just 0.78 times sales that have been pounded based on the Japan nuclear disaster. Not surprisingly, the company is repurchasing its shares.

For better or worse, nuclear power isn't going away (even in Japan, where two projects in which GSE is involved are moving forward). Too many decision makers recognize that we cannot afford to simply turn away from this economical, renewable source of power.

In the US, 16 companies and consortia are considering 30 new facilities, and domestic regulators currently have 13 pending applications. Meanwhile, 60 plants are under construction worldwide in 15 countries, with China figuring to be especially aggressive here well into the future. Also, 65 presently non-nuclear countries are considering entering the nuclear arena.

Regulatory review is typically focuses on safe operation rather than plant shutdown, and much of what comes out of the agencies in terms of safety works in GSE's favor. Escalating safety concerns translate to more intensive training and re-training, meaning higher degrees of simulation precision (fidelity), and in the US, training in connection with a new plant must now begin about two years before it goes operational.

Also, because the US nuclear industry has been on the back burner for so long, the workforce skews older (median age: 50). GSE estimates that 42% of the active employees will leave within the next five years and be replaced by newcomers who must be trained from scratch. (There is an element of pent-up need here...but for the bear markets that dented retirement savings, many workers would likely have already departed.)

Despite the potential of GSE’s traditional business, the company isn't standing pat. It's been extending its simulation capabilities to fossil-fuel plants, and the early 2010 purchase of TAS Holdings builds on that by bringing GSE into consulting and modeling for electrical distribution and grid systems.

The January 2011 acquisition of EnVision systems brings GSE into another related area: interactive multimedia tutorials and simulation models for the petrochemical and energy refining areas. In September 2011, GSE was selected in connection with the B&W mPower Small Modular Reactor to apply its simulation expertise to a new area, validation of plant system design.

And even within its bailiwick, GSE is engaging in quality expansion: Its Chinese joint-venture partner, Beijing UNIS Investment Co., is majority owned by China’s prestigious Tsinghua University, which created the simulation platform that serves as the basis for 50% of the simulators used in China’s fossil-fuel power industry. Not only will the customer base and relationships help generate nuclear business in China, but it will also likely boost GSE’s fossil-fuel capabilities.

Given the project-oriented nature of the business, I can’t rule out occasional disappointing quarters as jobs come and go. But on the whole, I really think the Street is missing a lot here. GSE Systems is a buy.

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