A hearty congratulations to investors who bought and held uranium giant Cameco’s (TSX:CCO) stock when its revenue was still going down five years ago. The contrarian investment could have paid off handsomely today. CCO stock has generated 258% in capital gains to shareholders during the past half-decade, thanks mainly to a nuclear market turnaround. Even so, shares appear undervalued.
Buoyed by a strong recovery in uranium prices, the uranium miner and nuclear fuel producer has seen its operations turn around for the better in recent years. Bullish investors bid up its share price as uranium prices finally broke out after a decade of persistent decline.
A $1,000 investment in Cameco stock five years ago could have more than tripled your money to $3,600 today. Good returns have been made, thanks mostly to a sustained rally in uranium prices from the decade lows around US$18 per pound recorded in 2016.
During the past five years, uranium spot prices soared from US$24 to a peak of around US$100 per pound in January 2024. A slight drop to US$95 per pound for February hasn’t signalled a reversal yet, and long-term contract prices (Cameco’s playfield) are still trending up. Contract prices have risen from US$32.50 in February 2020 to average US$75 last month.
A strong price regime reflects a return to demand growth and a bullish uranium market. But the most burning discussion for the day is whether Cameco stock can sustain recent growth momentum or warrant a new Foolish buy-and-hold position that may generate positive investment returns over the long term.
Cameco: A favourite supply partner in a growing allied global economy
Cameco is North America’s largest uranium miner. It owns some of the world’s best-grade uranium reserves that can be extracted through low-cost operating models. Political and public sentiment is warming up to a nuclear-powered green future — led by the group of seven (G7) most developed countries. Global economies’ increasing acceptance of nuclear providing stable electricity base loads means well for uranium, and the commodity may enjoy multiple years of strong prices going forward.
Most noteworthy, sustained geopolitical tensions, especially between Russia and Western allies, could be a positive tailwind for Cameco stock. The Canadian uranium mining giant, which doubles as a uranium fuel manufacturer and a nuclear projects designer, is a favourite contractor for European and North American nuclear fuel production tipped to replace Russian supplies.
Further, if global tensions persist for longer, some Western or “allied” customers may view Kazakhstan’s lowest-cost producer, Kazatomprom, as an increasingly risky uranium supply partner as long as its uranium delivery routes go through the Russians. Cameco may potentially grow its market share globally.
Can Cameco stock rise any further?
Cameco stock’s returns are highly dependent on nuclear market performance, especially on uranium commodity prices, which may remain volatile. Higher commodity prices for uranium over the next decade or two could continue to lift CCO stock as the miner earns gargantuan profits and produces positive cash flows. Your decision to hold or load up on Cameco stock should depend mostly on your outlook for uranium commodity prices and the company’s operating model, given evolving nuclear demand patterns.
Although Cameco isn’t the lowest-cost uranium industry producer globally (that title belongs to Kazatomprom), the company’s revived production is feeding into long-term supply contracts at lucrative prices, generating positive operating cash flows. Cameco’s diligent and strategically triumphant management team will use abundant cash flows for exploration and development activities — unlocking new production potential for decades to come.
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Interestingly, despite a recent run, Cameco stock looks undervalued, given the company’s potential earnings growth outlook. Bay Street analysts project a strong 65% long-term earnings growth rate for the uranium stock. Shares spot a forward price-to-earnings (P/E) multiple under 35. A forward P/E-to-growth (PEG) ratio of 0.7 indicates CCO stock is potentially underpriced and has room to grow.
According to legendary value investor Peter Lynch, a fairly valued stock should have a PEG ratio of one, which matches the P/E multiple to the company’s expected earnings-growth rate.
PEG ratios below one imply the market under appreciates the company’s potential to grow profits in the future, and Cameco stock could be a value play at today’s prices under $60 a share.
