The stock of Cameco Corp (CCJ, Financial) has seen a daily gain of 3.18%, and a 3-month gain of 29.42%. With an Earnings Per Share (EPS) of 0.15, the question arises: Is the stock significantly overvalued? This article aims to provide a comprehensive analysis of Cameco's valuation, encouraging readers to delve deeper into the subsequent analysis.
A Snapshot of Cameco Corp (CCJ, Financial)
Cameco is one of the world's largest uranium producers, with its flagship McArthur River mine in Saskatchewan accounting for roughly 50% of output in normal market conditions. Amid years of uranium price weakness, the company has reduced production, instead purchasing from the spot market to meet contracted deliveries. In the long term, Cameco has the ability to increase annual uranium production by restarting shut mines and investing in new ones. In addition to its large uranium mining business, Cameco operates uranium conversion and fabrication facilities.
The current stock price of Cameco (CCJ, Financial) is $41.16 per share, with a market cap of $17.80 billion. However, the GF Value, an estimation of fair value, is significantly lower at $28.34, suggesting that the stock is significantly overvalued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Given its current price of $41.16 per share and the market cap of $17.80 billion, Cameco stock is believed to be significantly overvalued. As a result, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength of Cameco
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Cameco has a cash-to-debt ratio of 2.23, which ranks worse than 51.45% of 173 companies in the Other Energy Sources industry. The overall financial strength of Cameco is 7 out of 10, which indicates that the financial strength of Cameco is fair.
Profitability and Growth of Cameco
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Cameco has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $1.50 billion and Earnings Per Share (EPS) of $0.15. Its operating margin of 2.65% is worse than 72.09% of 129 companies in the Other Energy Sources industry. Overall, GuruFocus ranks Cameco's profitability as fair.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Cameco is -0.8%, which ranks worse than 85.83% of 120 companies in the Other Energy Sources industry. The 3-year average EBITDA growth rate is -13.3%, which ranks worse than 86.96% of 138 companies in the Other Energy Sources industry.
Evaluating Cameco's Profitability
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Cameco's ROIC is 0.7 while its WACC came in at 10.87.
Conclusion
In conclusion, the stock of Cameco (CCJ, Financial) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 86.96% of 138 companies in the Other Energy Sources industry. To learn more about Cameco stock, you can check out its 30-Year Financials here.
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