Will Constellation Energy (CEG) Go Nuclear?
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U.S. energy consumption is expected to double in 2024 from 2023’s numbers, driven by AI and cloud computing centers. Our insatiable appetite has forced everyone to rethink their positions on power, particularly nuclear. Several states have begun plans to spin up mothballed nuclear plants. But no headline could match Constellation Energy’s (CEG) plans to restart 3-Mile Island, the site of the infamous 1979 nuclear meltdown to supply Microsoft with 20 years worth of power. The news sent the stock soaring +20% overnight while search volume by financial pros surged simultaneously. With electric utility stocks surging in the past few months, is Constellation Energy still a buy? |
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Constellation Energy’s Business Constellation Energy bills itself as the nation’s top producer of carbon-free electricity. From nuclear reactors to wind turbines, Constellation’s diverse energy fleet could power a staggering 16 million homes, while its innovative energy solutions serve everyone from Main Street shops to Fortune 100 giants across the Continental U.S. Constellation segments its business into the following areas:
Let’s briefly discuss Three Mile Island in Pennsylvania. Three Mile Island gained worldwide notoriety in 1979 when Unit 2 suffered a partial meltdown, marking the most serious accident in U.S. commercial nuclear power plant history. However, it’s crucial to understand that Unit 1, the reactor Constellation plans to restart, was not involved in the 1979 accident. Unit 1, which Constellation Energy plans to restart, continued to operate safely for four decades after the incident, shutting down in 2019 due to economic factors rather than safety concerns. Financials
Source: Stock Analysis Constellation’s revenues can be tricky to nail down because of competing, and often unrelated factors. For example, revenues declined in 2019-2020 when the company shut down operations at Three Mile Island. However, lower gas revenues and unfavorable marketing conditions as well as hedging activity pushed sales down over the last few quarters. You also have government tax credits that ebb and flow, making revenues difficult to forecast. It’s worth noting the company currently runs healthy margins across the board. However, Constellation Energy burns $5.5 billion in cash from operations. On top of that, they’re required to pay $5.8 billion to the nuclear decommission trust. Why does the company run a profitable P&L yet burn cash? It has to do with ‘other assets and liabilities’ which encompass deferred accounts receivables financing as well as tax credits. This money shows up in ‘Investing Activities’ which is outside of operational cash measures. Essentially, they have $15.4 billion they still get in cash tied to operations. It’s just classified elsewhere. Lastly, we want to point out the company pays a small 0.53% dividend, but does share buybacks worth an ~1.5% yield. Valuation
Source: Seeking Alpha Because of the cash classification situation, we had to manually recalculate the price to cash flow ratio, which comes out to around 8.3x. That makes Constellation cheaper than every other player on this list from Southern Company (SO) to Nextera Energy (NEE). However, when we measure Constellation Energy on a Price-to-Earnings basis, it’s more expensive than every other stock except Vistra Energy’s (VST) trailing 12-month price-to-earnings ratio. Growth
Source: Seeking Alpha What’s interesting is that all the power companies here saw revenue declines last year, while only two expect growth this year. That comes after a multi-year increase for everyone on this list except Talen Energy (TLN). Profitability
Source: Seeking Alpha Constellation’s margins, though good, aren’t the best. In fact, they’re often at or near the bottom in most categories. And currently, it fares poorly on returns on assets and total capital. Finally, we want to point out that it’s uncommon for electric companies to generate free cash flow. The majority pay high dividends, repurchase shares, and continually invest in the plants, leaving very little at the end.
Our Opinion 7/10 If you’re bullish on expanding nuclear power in the U.S., Constellation Energy is a bet that gives you a growth factor on top of the typical dividend payments and share repurchases. However, there are plenty of headwinds, politically and in the global supply chain, that could initially keep a lid on growth. Given the recent run, we’d wait for a pullback to get a better entry price for any long-term holds. |
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