I last wrote about NuScale Power (SMR) in late June. At the time, it had moved up to the 37th spot in Barchart’s Top 100 Stocks to Buy. The provider of SMR (small modular reactor) technology had a weighted Alpha of 100.75 and a 52-week change of 37.41%.
This morning in early trading, SMR stock moved up four positions in the top 100 to the third spot with a weighted Alpha of 323.45 and a 52-week change of 389.21%.
To say it’s been on a roll would be an understatement.
Although I noted in June that NuScale loses a lot of money, it made for an excellent speculative bet.
“While I like both businesses, if you’re a risk-taker, NuScale has the greater potential for a homerun investment in 5-10 years,” I wrote on June 25.
Although its stock has risen 61% since my article in June, it’s not been without a lot of volatility. This is not a stock for risk-averse investors. In fact, since I started writing this, SMR stock has fallen to 8th position in the top 100.
In recent days, nuclear stocks have benefited from the news Amazon (AMZN) will use SMRs at facilities in Virginia and Washington State.
Can the good times last? Maybe.
Nuclear Energy Gaining Traction
The International Atomic Energy Agency (IAEA) released its 2024 report about climate change and nuclear power on October 18. In it, the IAEA stresses the need for accelerated investment in nuclear power to reach goals for expanding this clean energy source.
“According to the report, global investment in nuclear energy must increase to 125 billion USD annually, up from the around 50 billion USD invested each year from 2017-2023, to meet the IAEA’s high case projection for nuclear capacity in 2050,” stated IAEA contributor Matt Fisher.
“The more aspirational goal of tripling of capacity, which more than 20 countries pledged to work towards at COP28 last year, would require upwards of USD 150 billion in annual investment.”
So, NuScale is undoubtedly playing in a potentially lucrative sandbox. The question is whether it can ever generate a profit.
NuScale’s Financial Viability
Like any burgeoning technology, a great product or idea is only as good as its commercial and financial viability.
Consider Lucid Group (LCID), the high-end EV manufacturer. It has a lovely product, but as of June 30, it had an accumulated deficit of $11.52 billion, up $2.60 billion in the past four quarters. You can only run this large a deficit for so long. Eventually, the deep-pocketed pension and sovereign wealth funds get tired of the losses and move on.
NuScale’s accumulated deficit as of June 30 was $284.6 million, up 40% in the past four quarters. In Q2 2024, it generated a measly $1.0 million in revenue with a net loss of $74.4 million. It can’t be fun losing $74 for every dollar in sales.
However, as NuScale CEO John Hopkins said in its Q2 2024 conference call, the need and demand for cleaner energy is significant.
“For instance, last month, Google reported that increased electricity demand driven by AI in its growing fleet of data centers caused the company's greenhouse gas emissions to grow 48% above its 2019 baseline, posing a challenge in meeting its carbon neutrality goals by 2030,” Hopkins said on Aug. 9.
Hopkins said the U.S. Department of Energy seeks to add 200 GW (gigawatts) of nuclear energy to meet its net zero emission goals by 2050. Nuclear power is the most reliable way to do that, so Amazon is deploying SMRs at its various facilities nationwide. As of June 30, NuScale had net cash of nearly $130 million and an Altman Z-score of 3.39--the Altman S-score indicates the probability of a company entering bankruptcy proceedings in the next 24 months--which is well above 1.81, the floor for companies not in financial distress.
Fluor Remains in Control
Fluor (FLR) first invested in NuScale in October 2011, providing $30 million for a controlling stake. Fluor’s history of building big construction projects, including more than 25 nuclear facilities worldwide, made it the perfect partner to take the technology to the next level.
Between October 2011 and the completion of NuScale’s SPAC merger to go public in May 2022, Fluor invested over $600 million in the technology’s development. Today, it controls 52.2% of the voting power. If converted to tradable Class A shares, those Class B shares are worth $2.2 billion.
Should NuScale’s SMRs continue to gain traction with large energy users like Amazon, its investment will be worth considerably more than its core infrastructure business.
This means if you subtract $2.2 billion from Fluor’s $9.2 billion market cap to account for its investment in NuScale, buying Fluor stock rather than NuScale, you would get Fluor stock for just 0.4x sales based on $15.74 billion in trailing 12-month revenue.
Despite the 58% gain in Fluor stock, it looks undervalued, given the upside potential of NuScale.
One possibility to ride the nuclear train but with less risk is to buy 100 shares of Fluor (approximately $5,400 at current prices) and the equivalent amount in long put options for NuScale to protect on the downside.
That would be three puts and a net debit of $810 ($270 times 3) for a total outlay of $6,200.
Alternatively, if you’re aggressive, you can buy three long $20 calls, also expiring on Dec. 20, for the same price of $810 as the puts and forget about the Fluor stock. More Stock Market News from Barchart
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