Shareholders of Centrus Energy would probably like to forget the past six months even happened. The stock dropped 22.2% and now trades at $152.34. This might have investors contemplating their next move.
Is now the time to buy Centrus Energy, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Centrus Energy Will Underperform?
Despite the more favorable entry price, we’re cautious about Centrus Energy. Here are three reasons why there are better opportunities than LEU, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
In Energy, scale separates fragile single-asset producers from platform-style businesses that generate revenue across entire basins and infrastructure networks.
Centrus Energy’s $473.9 million of revenue in the last year is pretty small for the industry, suggesting the company is a subscale business in an industry where scale matters.
2. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
Centrus Energy, which averaged 32.3% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Shrinking EBITDA Margin
Adjusted EBITDA margin is an important measure of profitability for the sector and accounts for the gross margins and operating costs mentioned previously. Unlike operating margin, it is not distorted by accounting conventions around reserves, drilling costs, and assumptions on commodity consumption from the well or basin. Adjusted EBITDA highlights the economic reality of how much cash the rock produces before the capital structure (debt service) and the drilling budget (capex) are considered.
Looking at the trend in its profitability, Centrus Energy’s EBITDA margin decreased by 46.1 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Centrus Energy’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its EBITDA margin for the trailing 12 months was 10.3%.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Centrus Energy, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 46.9× forward P/E (or $152.34 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Centrus Energy
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