In January 2017, Cameco Corp. (TSX:CCO)(NYSE:CCJ) was one of six Canadian companies included in Corporate Knight’s rankings of the top 100 most sustainable companies in the world. However, this global leader operates in the highly cyclical uranium industry. Does its leadership position warrant a buy in a cyclical industry? Here’s a quick look at the company to help you answer that question.
Cameco is the largest publicly traded uranium company in the world and the world’s second-largest uranium producer. In addition, the company has some of the highest-grade uranium deposits in the industry which account for 17% of the global production. With ore concentrations 100 times higher than the industry average, Cameco is a clear leader within the industry.
However, like most commodity-based companies, Cameco has seen severe fluctuations in uranium prices. Uranium was once at a high of $72/pound in 2011 then plummeted to a low of $30/pound in December 2017, which has put some pressure on its earnings as of late.
Although the uranium market has been volatile, Cameco has sustained an advantage over other uranium producers due to its low production costs. This is crucial in a narrow-moat industry, as suppliers with the lowest production costs can sustain a competitive advantage over its competitors and continue to generate cash flows in a downturn within the cycle.
At production costs of $21/pound, Cameco can still generate sufficient cash flows and be well positioned to capitalize on an increase in uranium prices. Therefore, investors have reason to believe the company can support its current dividend yield of 2.7%.
From a valuation perspective, the stock is currently trading at a price-to-sales ratio of 2.3, which is well below its five-year average of 3.1. In addition, it’s trading at a price-to-book ratio of 1.1, which is less than its five-year average of 1.5.
The stock has gone up almost 50% since its 52-week low in November 2016; however, it’s still priced below its historical averages. Therefore, the combination of the stock’s current valuation and an expected increase in uranium prices creates an entry point for investors who seek exposure to this industry.
Foolish bottom line
For a company in a cyclical industry, Cameco is a lower-risk play. However, the company’s performance will still be significantly impacted by the market demand for uranium. Foolish investors should be looking for great companies in growing industries. Cameco is a fantastic company, but the uranium industry is very volatile, so investors beware.
I believe Cameco provides investors with an opportunity to gain exposure to an industry they may not typically have, but it should not be a core holding.
If you love dividend stocks or are in need of retirement income, we have a brand-new, exclusive report that’s a must-read for any serious investor.
Written by celebrated Canadian journalist Jonathan Chevreau, this report outlines one of the ‘wonders of the investment world’ – how to use it, capitalize on it, and make money as best you can.
Fool contributor Colin Beck has no position in any stocks mentioned.