7 Stocks to Benefit From Nuclear Shortage

BOSTON (TheStreet) -- The nuclear meltdown in Japan is prompting the world to reassess its reliance on nuclear energy.

"One thing is certain: Events in Japan will have a profound effect on the nuclear power industry in the U.S. and throughout the world for some time to come," said Standard & Poor's in a March 16 research note.

Nuclear energy provided 13.5% of the world's electricity in 2008, and it has grown rapidly since then, according to the International Energy Agency. So it would take a huge shift in the world's energy-producing industry if governments decide nuclear power isn't worth the risk.

North America's electricity is generated primarily from three resources: coal, at 45%, nuclear energy, 24%, and natural gas, 19%.

Natural gas and coal producers are expected to see a spike in demand to fill the gap for lost nuclear-generated electricity capacity, while alternative energy sources, such as solar and wind, are likely to gain new supporters.

Share prices throughout the energy industry have gone haywire over the past week with the huge, diversified utilities sector, which includes electricity producers that have coal and nuclear-energy generation plants, losing 2%, while the small $15.5 billion solar energy industry gained 8.6%.

The S&P 500 Index lost 1.6% over the week ending March 17 and is up only 1.7% this year. The benchmark index has dropped about 5% in the past month.

For now, the long-anticipated "nuclear renaissance" looks like it's on hold. Gary Anderson, co-manager of the $7.6 billion Scout International Fund ( UMBWX), said in an interview Friday he expects new construction or expansion of nuclear plants will be postponed for at least six months to a year, as governments and the industry reexamine safety concerns and refines plans for new plants.

The result will require significant new investments and much higher operating costs.

But Anderson is confident nuclear energy will make a comeback. "Modern civilization needs clean, reliable energy, and nuclear energy provides that and is the energy of the future."

Travis Miller, head analyst of the utilities sector at Morningstar, agrees. He said Thursday that "nuclear power will still be a significant energy source in the U.S. for the foreseeable future."

In the interim, there's a worldwide scramble for sources of energy to fill the gap caused by the loss, or reduction, in nuclear-power capacity.

Here's a review, on the following pages, of four nuclear-industry companies that face immediate challenges, but could rebound when governments come to terms with nuclear power, as well as three that are leading producers of energy resources seeing renewed investor interest.

One example of how difficult it is to divine the energy sector's direction is the situation at NRG Energy ( NRG), which generates energy from coal and nuclear resources in the U.S. and four other countries. It sells it wholesale to other utilities and to a huge network of retail customers in Texas, California and the Northeast.

The Princeton, N.J.-based company is in the planning stages of expanding its nuclear facility in Bay City, Texas, essentially doubling its output, which would make it the nation's largest nuclear power plant. Coincidentally, its partner in that deal, with an 18% stake, is Tokyo Electric ( TKECF), the operator of the crippled Fukushima Daiichi nuclear power station in Japan.

NRG has a loan guarantee from the U.S. Department of Energy to help fund that expansion. The White House said recently it's going to continue to support new nuclear energy programs while reviewing safety precautions and plants' ability to withstand natural disasters.

NRG also has top-notch coal resources including coal-fired power plants and a cheap source due to its holdings in the Powder River Basin in Wyoming.

Analysts tracked by TheStreet recently gave the company four "strong buy" ratings, one "moderate buy" and eight "hold," but those ratings could change soon as analysts reevaluate the energy sector as events unfold around the world.

NRG's shares have been on a roller-coaster over the past few weeks, gaining 6% over the week ending March 17. But its shares are down 1.6% over the past month and 8.8% over 12 months. It has a market value of $5 billion.

Another company that could see its fortunes gyrate is the engineering and construction firm The Shaw Group ( SHAW). It builds new and refurbishes older nuclear power plants, and it is currently working on several new facilities worldwide, including in China, one of its biggest customers.

China has announced a review of its nuclear facilities and aggressive expansion plans in the wake of the disaster in Japan.

Shaw also has customers in the oil refining and chemical industries, and an environmental and infrastructure segment that serves government agencies.

It also manufactures pipe systems that go into many types of power plants and petrochemical facilities, and it has a 20% stake in Westinghouse Electric, one of the leading providers of nuclear power plant technology and services.

Shaw said in a press release March 14 that it doesn't expect there will be an impact on its nuclear projects under construction in the U.S and China as its customers said they expect construction will continue as planned.

Shaw's shares lost 17% in the week ending March 17 and they're down 5.9% this year, giving the company a market value of $2.8 billion.

Entergy ( ETR) is the second-largest nuclear-operating company in the U.S. with six nuclear plants in prime markets in the Northeast and Midwest, and it also has substantial generating capacity from coal-fired plants. The company is also a regulated utility that distributes power to 2.7 million customers across four states in the South.

Morningstar analyst Travis Miller said in a March 16 research note that Entergy faces the most near-term risk of any U.S. utility following the nuclear disaster in Japan, because four of its six plants need operating license renewals in the next four years, and they all likely face tough fights for approval.

"Now with power markets still languishing in the Northeast and electricity demand rebounding in the industry-heavy Southeast, Entergy's six regulated utilities will be the stars of the next three to five years" for the company, he said. "But we continue to believe Entergy's long-term value driver is its nuclear fleet."

He adds that "Entergy typically reaps 60% operating profit margins from its nuclear fleet. This cost advantage is why we consider nuclear power plants to have wide-moat characteristics and strong value-creation potential."

Entergy shares were down 11% in the week ending March 17 and off 6.4% this year, bringing the company's market value to $12 billion.

Shares of nuclear-energy industry suppliers have been hard hit over the past week as investors expect they'll be see lower demand.

Cameco ( CCJ), one of the world's largest uranium miners, with huge reserves in Canada, has seen its shares do an about face in the past few weeks, along with the rest of its industry. The industrial metals and minerals group, of which it is but a small part, is down 35% over the past month, including 1.3% in the past week.

Cameco thrived as the prospect of rising demand for its particularly high-grade "yellowcake" uranium boomed as more nuclear plants came on line over the past few years and given the prospect of many new ones.

Uranium prices had surged over 50% since mid-2010 and Cameco's share price reached a multi-year high of $44.81 on Feb. 12. But since the disaster in Japan, shares have tumbled, falling 23% in the one-week period ending March 16. They're now down 27% this year with its shares trading at $28.70.

Gary Anderson, co-manager of the $7.6 billion Scout International Fund ( UMBWX), which has a large stake in Cameco, said its stock has taken a hit, but he doesn't think the company will be hurt long-term as about 85% of its sales are to the U.S. and Canada and only about 10% to 12% to Japan. And, over time, other markets from Russia to Asia should pick up the slack of any lost business.

The big question for the company is how much of the nuclear energy generation market will be cut back and for how long. But long-term, this could be an exceptional play as a sharp decline in demand could potentially knock out some of its many smaller competitors, which have higher production costs since they mine lower-grade uranium that needs refining.

Natural gas producers are going to be among the biggest beneficiaries of the shifts in demand for energy resources as it is cheap and plentiful due to North America's oil shale reserves and natural gas has multiple uses in addition to use in electricity generation plants.

At its current, historically low price, natural gas is an affordable source for electricity generation. But it is a volatile commodity and if prices rise quickly that advantage could quickly evaporate.

Chevron ( CVX), the second-largest oil company in the U.S., behind only Exxon Mobil ( XOM), is in a good position to feed Asia's demand for natural gas as it recently announced it has begun work on an expansion of its $43 billion liquefied-natural gas project in Australia, which means it's likely to become a big supplier to Japan, already a big consumer.

In addition, Chevron has refineries in the U.S., U.K., South Africa and Asia, all stable politically, which means uninterrupted production. It also is cost-efficient as it is an integrated company, taking on everything from exploration, to production and refining.

A recent acquisition of Atlas Energy offers Chevron a strong position in one of the premier North American oil shale fields and its strong cash position could lead to additional exploration or acquisitions.

Chevron shares are up 13% this year and 41% over the past 12 months, giving it a market value of $208 billion.

Coal companies are seeing renewed interest in their long-running roles as an energy source for generating electricity as there are thousands of coal-fired plants around the country. Through March 17, the Dow Jones Coal Index is up 23% over the past year, including 4% over the past week.

Morningstar analyst Travis Miller said Thursday the strength of coal shares now is most likely due to expectations there will be increased demand from Asia, and Japan in particular, to make up for its lost nuclear capacity.

"But coal power remains a political hot potato in the U.S., and I don't think we will see significant expansion of coal generation" in the country due to concerns over carbon emissions, he said.

U.S. coal demand has been flat and had been expected to stay that way until the situation in Japan shook the world. But if state governments are going to hold up recertification of existing nuclear plants, or ask that they be decommissioned, then the coal industry is likely to be a big winner at home, despite stricter emissions regulations to reduce the carbon emissions from coal-fed power plants.

The world's largest private-sector coal company, Peabody Energy ( BTU), supplies more than 10% of the coal used to generate electricity in the U.S. and 2% worldwide.

A Standard & Poor's analyst had a rosy outlook for Peabody even before the events in Japan. He wrote in a Feb. 3 research note that "after a 13.9% increase in revenue in 2010 on somewhat higher volumes and stronger pricing, we project that revenue in 2011 will expand by 26%. Our forecast is based partly on a nearly6% projected increase in coal volume, as demand continues to grow.

"In addition, we think (Peabody) will benefit from higher industry pricing for thermal and metallurgical coal following recent supply disruptions, and we expect a 19% increase in pricing," it said.

Peabody's shares rose 13.8% for the week ending March 17 and are up about 42% this year, as tracked by Morningstar. Peabody has a market value of $19 billion.

It is likely to be one of the biggest beneficiaries of a renewed demand for coal to generate electricity. That's because Peabody has been aggressively investing in Australia, acquiring working mines and mining properties.

If Japan, China, India and other Asian countries decide to shelve their nuclear energy production or even slow it down, Peabody will be in a great position to supply their coal-fired power plants.

Solar-power stocks have jumped 8.6% since the nuclear disaster in Japan, but it's important to realize that solar provided a mere 0.6% of the world's electricity in 2008, the latest period that data are available, according to the International Energy Agency.

Germany, which announced the shutdown of seven of its older nuclear plants last week for extensive inspections, will likely be the source of big demand for solar products as it accounted for 40% of solar installations over the past two years, according to global investment bank Credit Suisse.

Other nations are likely to increase their incentives for solar power, one of the big drivers of solar equipment sales, after the nuclear incident in Japan.

Unfortunately, U.S. solar-panel maker SunPower ( SPWRA) could see solar wafer supply disruption because it relies on a Japanese firm for up to 20% of its supplies, according to Credit Suisse.

One industry leader that has a bright future is First Solar ( FSLR), a Tempe, Ariz.-based maker of solar panels and turnkey solar installations.

It has been aggressively expanding, and its latest move is particularly fortuitous. Recently it announced plans to build a $300 million manufacturing center in Arizona that would roughly double the solar-panel maker's U.S. production capacity. Construction, expected to last a year, will begin in the second quarter.

That follows a recent expansion of its Ohio plant and would bring its U.S. production capacity to more than 500 megawatts a year.

The U.S. solar-power market doubled in 2010 over the previous year and is expected to double again this year, according to industry estimates. And that was before the nuclear incident in Japan. That event could prompt the Obama administration to increase incentives for the use of solar and provide a significant boost in demand for solar energy products.

First Solar is also working on the first phase of a 2,000-megawatt solar farm in China and has 100 megawatts of solar projects under way in India.

Since energy is a form of commodity, the solar-energy industry is driven by cost, and those companies with the cheapest products are performing the best. Morningstar analyst Stephen Simko said, in a March 17 research note, that "First Solar holds a more than 20% cost advantage over its nearest competitors, even after adjusting for its lower panel efficiencies. So long as the company continues to reduce its costs by 10% to 15% on an annual basis, we see little chance of its cost lead disappearing anytime soon."

First Solar's shares are up 10% over the past week and 18% this year, giving it a market value of $13 billion.

>>To see these stocks in action, visit the 7 Stocks to Benefit From Nuclear Shortage portfolio on Stockpickr.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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