Nuclear Energy Is In Decline But 3 Industry Stocks Have Strong Profitability

Mary-Lynn Cesar, Kapitall: The World Nuclear Association ranks the United States as the global leader in nuclear power production. According to the WNA’s May profile of nuclear power in the United States, the country is responsible for 30% of total global nuclear generation of electricity. Domestically, the WNA states that nuclear power generated 19% of the United States’ electricity in 2011 with coal and gas generating 43% and 24%, respectively.

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However, Bloomberg reports that the 19% share is the industry’s lowest since 1998, which – combined with the closing of four reactors thus far this year – supports claims of its decline. For the past 30 years, the nuclear industry has faced a lull in reactor construction, and although plans are underway for new units, the WNA notes that low natural gas prices have placed the future of many of those projects in doubt.

Meanwhile construction is currently underway for four nuclear reactors: Vogtle 3 and 4 in Georgia and V.C. Summer 2 and 3 in South Carolina. The Vogtle plant is noteworthy for its approach to design, construction, and regulation, which the industry hopes will result in a cheaper, more efficient way of building reactors. A New York Times article covering the Vogtle reactor points out that the projects’ success will be instrumental in determining whether the cost of constructing a new reactor can be justified given the low prices of natural gas.

Business Section: Investing Ideas

As nuclear reactors continue to age, energy companies are faced with expensive renovations and construction as well as the option of shutting down operations. Given the expenses involved with these decisions, we decided to turn our focus to domestic energy companies that appear to be managing their costs well.

To screen for this, we looked for domestic energy firms more profitable than the industry average on the basis of trailing twelve month (TTM) gross, operating and pre-tax margins.

TTM Gross margin is the percentage of revenue remaining after a company has paid its production expenses. TTM Operating margin, a measure of operating efficiency, refers to the percentage of revenue left after all operating expenses have been paid. TTM Pretax margin is a company’s pre-tax earnings, and the higher the pretax margin, the more profitable the company.

After running the screen, we were left with three companies involved with nuclear energy.

Interactive chart: Use Kapitall's Compar-o-Matic to see changes in average analyst ratings for the stocks listed below. 

Do you think these companies are well equipped to overcome the challenges facing the nuclear energy sector? Use this list as a starting point for your own analysis. 

Analyze These Ideas:  Access a performance overview for all stocks in the list.

 

1. Westar Energy, Inc. ( WR): Engages in the generation, transmission, and distribution of electricity. Market cap at $4.B, most recent closing price at $31.49.

TTM gross margin at 37.51% vs. industry average at 29.68%. TTM operating margin at 26.19% vs. industry average at 19.42%. TTM pretax margin at 19.08% vs. industry average at 13.06%.

Westar Energy is a majority owner of Kansas's Wolf Creek Generating Station, which received a sixty-year renewal license from the Nuclear Regulatory Commission in 2008.

 

2. Pinnacle West ( PNW): Provides retail and wholesale electric services primarily in the State of Arizona. Market cap at $6.23B, most recent closing price at $56.66.

TTM gross margin at 38.56% vs. industry average at 29.57%. TTM operating margin at 26.45% vs. industry average at 19.38%. TTM pretax margin at 20.96% vs. industry average at 13.05%.

The company's Arizona Public Service affiliate serves as operator and co-owner of the Palo Verde Nuclear Generation Station, the country's largest nuclear generation facility.
 

3. Southern Company ( SO): Operates as a utility company that provides electric service in the southeastern United States. Market cap at $38.55B, most recent closing price at $44.26.

TTM gross margin at 37.76% vs. industry average at 29.68%. TTM operating margin at 26.99% vs. industry average at 19.42%. TTM pretax margin at 19.57% vs. industry average at 13.06%.

The company's nuclear energy operating company, Southern Nuclear, operates the Farley, Hatch, and Vogtle plants, which provide roughly 20% of Alabama and Georgia's electricity. It is currently building the Vogtle 3 and 4 facilities.
 

( List compiled by Mary-Lynn Cesar)

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