Nuclear Builder Will Bounce Back
04/07/2011 3:37 pm EST
Even if Fukushima slows reactor building plans, the renewed focus on safety could benefit the Shaw Group, writes Glenn Rogers in the Internet Wealth Builder.
The tragedy that has been unfolding in Japan has left us once again in awe of the powers of nature that we cannot control.
Japanese stocks weren't the only ones hit. Almost every company associated with the nuclear industry saw its share price plunge.
General Electric (GE), which manufactures nuclear plants and which designed the troubled Fukushima facility, saw its share price drop by 10% between March 9 and March 15 before rallying. Uranium miners like Denison (DNN) and Cameco (CCJ) were also clobbered.
Also slammed was the Shaw Group (SHAW). This Louisiana-based integrated engineering firm is a key player in the nuclear industry, which is why the share price tumbled 32% between March 8 and March 14 before rebounding somewhat.
Shaw is a Fortune 500 company with fiscal-2010 annual revenues of $7 billion. It has approximately 27,000 employees around the world.
Shaw designs, builds, and maintains a number of nuclear facilities around the world, and the market is guessing that at least some of these projects may be stalled or canceled as a result of what has happened in Japan. The fact that some countries, such as Switzerland, have declared a moratorium on the construction of new nuclear facilities has reinforced that view.
(Switzerland generates about 40% of its electricity from five nuclear plants, and had recently approved the construction of three more. The Swiss decision seems illogical, as the country is geologically stable and is about the last place on earth that would be affected by a tsunami.)
I think the impact on Shaw's business will be less dramatic than the market expects. If Japan is able to contain the radiation leaks so that there are no widespread human health consequences (which we all devoutly hope will be the case), I think it is likely that most of the proposed projects that Shaw is involved with will go ahead, albeit at a slower pace. [This remains a dicey proposition, as new problems and risks continue to crop up at Fukushima—Editor.]
Also, I think the market is missing the fact that a significant part of Shaw's business is environmental remediation services. The company could benefit from increased safety requirements for planned nuclear sites—but also for existing facilities that may have to be upgraded to satisfy increased paranoia on behalf of national governments around the world.
This ongoing maintenance and modification work should add to the company's pipeline, even if there are delays in the construction some of the new facilities.
On March 13, the company released a statement regarding the disaster in Japan from CEO J.M. Bernard Jr., which said in part: "At this time, we do not believe that there will be an impact on Shaw's nuclear projects currently under construction United States and China. Our customers have indicated they intend to move forward, and we believe the construction timeliness will continue as planned."
He added: "The new generation technology under construction today has been designed with greater safety systems in place that will even more effectively address the challenges we are seeing in Japan. The industry consistently incorporates operating experience and lessons learned and will continue to use those insights to make nuclear energy even safer."
The company is also broadly exposed to a diverse portfolio of other projects, including renewable energy, along with more traditional fossil-fuel sources like coal and natural gas, so they are not solely dependent on nuclear-related work.
Of course, all bets are off should there be a worsening of the crisis in Japan to the point where a core meltdown in one or more the reactors leads to significant loss of human life. If this were to happen, the nuclear industry could be crippled for extended period of time.
However, short of that—and given the large number of installed nuclear facilities worldwide, combined with an increasing need for clean power sources (I am not counting nuclear waste here)—there is going to be an ongoing need for the services of Shaw Group.
The shares are a buy for aggressive investors with a target of $42.
[Shares traded near $35 Thursday. Opinions on the post-Fukushima outlook for nuclear energy are mixed. Elliott Gue, Gordon Pape, and James Trippon remain optimistic that plans to build new reactors, especially in China and India, will proceed after a decent spell. George Wolff has counseled greater caution—Editor.]