Is Cameco Corp. a Buy After its Latest Dip?

Why investing in Cameco Corp. (TSX:CCO)(NYSE:CCJ) might be worth the risk.

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Cameco Corp. (TSX:CCO)(NYSE:CCJ) has seen its share price lose 17% of its value so far this year, and last week the stock took another dip below $11 a share after analysts at Bank of Nova Scotia downgraded the stock amid concerns of a weaker outlook for the price of uranium.

Uranium prices have been stable this year

The price of uranium is a little over $20 right now, and in the past year it has been at lows not seen in more than a decade. There are concerns of oversupply, and demand for uranium has been low since the Fukushima nuclear disaster took place in 2011. However, earlier this year, some analysts were expecting a return to $30 in a few years and $50 in five. The problem with predicting any commodity price is that expectations can change in a short period of time.

Unfortunately, much like struggling oil and gas stocks, the success of Cameco’s stock price will be linked to a commodity price. It is for that very reason that Cameco has some risk, but it has a lot of potential upside as well. Given how much the price of uranium has dropped in just two years (44%), it is hard to imagine much more of a decline happening.

Potential for upside

Not only could Cameco see a rise in price if uranium prices increase, but also if the company has a favourable result from its dispute with Tokyo Electric Power Company Holdings Inc., which cancelled a contract. Cameco says the cancellation is without basis. Although the dispute is still ongoing, a lot of investors have likely assumed the $1.3 billion contract is gone, and a positive result could see the stock make a big jump in price.

Strong financials keep the company safe

If uranium prices continue to drop, then Cameco is still not hopeless. The company currently pays a dividend of 3.4%, and if times get tough, the payout could be reduced or even eliminated. However, a strong balance sheet gives Cameco some flexibility with what it decides to do. Its debt-to-equity ratio is a manageable 0.29, and its current ratio of 5.8 suggests there are no short-term liquidity risks.

Cameco has also grown its free cash flow in each of the past three years, and in the past four quarters, it has accumulated $605 million. By having lots of free cash and strong liquidity on its books, the company puts itself in a good position to handle difficult times ahead.

Should you buy Cameco today?

Despite the doom and gloom for uranium prices, Cameco does not strike me as a company with significant risk. Although uranium prices are low, there are many factors that could impact demand and that could change the outlook significantly. The stock currently trades at 90% of its book value and could be a great buy for value investors that are willing to take on some risk in return for a lot of potential upside. If the company keeps its dividend intact (and with strong free cash flow, it may very well do so), then you could earn a very decent yield, while you wait for demand to drive uranium prices back up.

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 David Jagielski has no position in any stocks mentioned.

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