After its Mixed Q3 Results, Should You Buy or Avoid Cameco Corporation?

Cameco Corporation (TSX:CCO)(NYSE:CCJ) released third-quarter earnings on October 30, and its stock reacted by falling over 2%. What should you do with it now?

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Cameco Corporation (TSX:CCO)(NYSE:CCJ), one of the world’s largest producers of uranium, announced mixed third-quarter earnings results after the market closed on October 30, and its stock responded by falling over 2% in the trading session that followed. Let’s take a closer look at the results to determine if this weakness represents a long-term buying opportunity or a warning sign to avoid the stock for the time being.

The results that failed to impress the market

Here’s a summary of Cameco’s third-quarter earnings results compared with what analysts had anticipated and its results in the same quarter a year ago.

Metric Q3 2015 Actual Q3 2015 Expected Q3 2014 Actual
Adjusted Earnings Per Share $0.20 $0.30 $0.23
Revenue $649.05 million $645.75 million $587.14 million

Source: Financial Times

Cameco’s adjusted earnings per share decreased 13% and its revenue increased 10.5% compared with the third quarter of fiscal 2014. Its double-digit percentage decline in earnings per share can be attributed to its adjusted net earnings decreasing 16.1% to $78 million, led lower by its total costs of sales increasing 16.1% to $515.96 million.

Its double-digit percentage revenue growth can be attributed to sales increasing in two of its three major segments, including 89.7% growth to $183.38 million in its NUKEM segment and 17.4% growth to $83.48 million in its Fuel Services segment, and this was only partially offset by a 13.3% decline to $387.66 million in its Uranium segment.

Here’s a quick breakdown of six other notable statistics from the report compared with the year-ago period:

  1. Production volume of uranium increased 51.9% to 8.2 million pounds
  2. Purchase volume of uranium increased 50% to 2.7 million pounds
  3. Sales volume of uranium decreased 23.3% to 6.9 million pounds
  4. Average realized selling price of uranium increased 12.5% to $56.07 per pound
  5. Total cost per pound of uranium produced increased 20.4% to $32.07
  6. Gross profit decreased 6.9% to $133.09 million

Should you be a long-term buyer of Cameco today?

It was a disappointing quarter overall for Cameco, so I think its stock responded correctly by moving lower.

However, I also think the decline represents an attractive long-term buying opportunity, because the stock is a great value play, as it now trades at just 16.3 times fiscal 2015’s estimated earnings per share of $1.11 and only 13.3 times fiscal 2016’s estimated earnings per share of $1.36, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 27.3.

I think Cameco’s stock could consistently command a fair multiple of at least 18, which would place its shares upwards of $24 by the conclusion of fiscal 2016, representing upside of more than 32% from today’s levels.

In addition, Cameco pays an annual dividend of $0.40 per share, which gives its stock a solid 2.2% yield, and this will amplify the potential returns for investors going forward.

With all of the information provided above in mind, I think Cameco represents the best long-term investment option in the uranium industry. All Foolish investors should take a closer look and strongly consider using the post-earnings weakness to begin scaling in to positions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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