Gathering New Information about Stocks, Health, and Sports

Introduction

USEC Inc (USU) is an $899 million company in the non-metallic and mining industry. Competitors in this industry include Compass Minerals International, Harry Winston Diamond, and Potash Corporation. The non-metallic and mining industry is up 106.2% over the past year compared to the S&P 500, which is up 2.79% during the same period. Over the past month the industry has been up 2.07%, while the S&P 500 has been down 4.05%. Strong recent earnings from this industry and high commodity prices contribute to strong potential for this industry to grow. Specifically, USEC's growth and valuation illustrate the potential for a capital appreciation for investors in the next few quarters.

Business

This section describes what USEC produces. According to Reuters, USEC "supplies low enriched uranium (LEU) for commercial nuclear power plants." Working with nuclear reactors in over 150 countries, there is tremendous potential for this company to make great gains. Despite the underpinnings of war and harm, tensions remain high in the world, and if the United States or Russia does get more defensive with its weaponry strategy, USEC will surge. Even less threatening, uranium can be used for energy purchase and as a substitute for other widely-used goods, which may be great for the company in the long term. Specific to the United States, USEC operates for the Department of Energy (DOE) and other contractors at Paducah and Portsmouth plants.

However, while Russia and other countries do purchase products from USEC, the United States is the main consumer of USEC's main uranium product. The important thing about USEC's relations with the electric utility companies, who the corporation supplies the products too, is the length of time for contracts. All contracts, assuming requirements are met, are long-term, ensuring unearned revenue to be recognized on the income statement only in the future. Therefore, there are great benefits owning shares of USEC right now, especially when the potential for future gains are so high.

Growth

USEC is growing solidly. Revenue, according to Reuters, was $1.84 billion the past fiscal year. This figure is the second highest number in the corporations industry. Moreover, this number was 0.05% higher than revenue a year prior. The percentage increase was higher than the industry's average at negative 1.13%. Now compared to the other rivals, some investors may question USEC's ability to compete with its market-cap competitors including Compass and Harry Winston. Both these corporations have growth rates in excess of USEC's. However, while growth is important, it is also important to remember the long-term contracts USEC uses. Unearned revenue is not reported as part of the income statement. However, since these competitor corporations have seen such amazing growth share price and sales figure wise, there is little question if USEC will see similar gains in the next couple of quarters. Already, USEC, in its most recent quarter, has seen earnings jump over 345.75%--a number significantly above the industry average at 190% and also above competitors Compass (188%), Harry Winston (-42%), and Potash (96%). Therefore, there is very strong potential for USEC.

However, the above information is not supposed to suggest that USEC had terrible margins this past fiscal year. It's true USEC's gross (17.58%), operating (7.76%), and net profit (6.02%) were all below the industry averages and competitors averages, but they were not down by much. For example, the industry net profit margin was 6.25%. This number is only 4% higher than USEC's net profit margin. If USEC can continue its strong earnings reports found this past quarter, there is no reason why USEC cannot surpass the industry average and beat out some of its competitors as well.

Moreover, USEC is still generating strong earnings per shareholder equity. The company's ROE was 10.02% the past fiscal year, which easily beat out the industry average at 5.77%. Moreover, USEC's ROI at 6.00% was also higher than the industry's ROI average of 5.98%. Cost controls are a huge reason why stocks perform so well. And compared to other competitors, who may have great gross margins see too large a drop when operating and other income expenses are factored in, USEC excels in trying to keep its earnings steady with other income lines. Therefore, once again, there is strong reason not to underestimate USEC's management and growth potential.

Valuation

Fortunately for investors, a little lag in growth means better valuation opportunities. Currently, the industry has a price to earnings multiple at 14.54 and a price to sales multiple at 0.51. However, USEC only has a forward P/E ration of 10.54 and a forward price to sales multiple of 0.40. These are great numbers compared to industry competitors. Respectively, Compass (19.96 and 1.48), Harry Winston (24.33 and 3.53), and Potash (34.10 and 7.56) all have higher valuation metrics. This finding illustrates USEC's terribly undervalued status and potential for a huge increase in share price given analyst estimates. And since analysts have estimated below earnings for the past five quarters for USEC, there is a strong chance that USEC is even more undervalued. However, most importantly, USEC's PEG ratio is 1.19. Potash has a 3.34 ration and Compass has a 3.98 multiple. This finding indicates not only low valuation, but low valuation with high growth opportunity.

Efficiency

USEC is fairly efficient. The company's receivable turnover of 6.95 is comparable to the industry at 8.79. This means every 52 days, USEC receives cash for selling goods. Asset turnover at 0.79 is also strong compared to competitors like Harry Winston and Potash. This number means that USEC makes good use of buying and selling its assets to generate revenue. Moreover, USEC has more than enough assets to cover its liabilities. The most recent current ratio of 2.13 illustrates the company's solvency. The company's debt to equity ratio of 0.28 is also supportive of the option of liquidity. Some investors may question no risk equals no growth, but with such strong valuations and earnings potential, there may be no need to assume too much risk.

Moreover, USEC has great cash flow compared to its price (all multiples below one), especially compared to the rest of the industry (all multiple above one). Institutional investors have recognized the benefits of more cash and other fundamentals. Currently, institutions own 81.16% of all USEC shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

USEC has performed poorly share price wise over the past few quarters. However, the golden rule of investing is buy low, sell high. In 2007 the company's share price is down 36.01%, due more to fundamental issues rather than economic external attributions. The company was only up 6.03% in 2006, but had not experienced a negative calendar year since 2002 (a recession year) before 2006. Interestingly, since November 2003 up to November 2007, USEC's share price is up a solid 14% for a nice safe bet in basic materials.

More specific to the current month, USEC illustrates strong technical signals. The 50 day SMA and 50 day EMA are both falling, but parabolic SAR is above the current share price�a bullish signal. Moreover, the company has an unusual RSI index at 36 and a fast stochastic at 15, both incredibly undervalued signals. Therefore, now may be the perfect time to purchase shares of USEC according to technical analysis and potential earnings rises.

Conclusion

USEC is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
November 23rd, 2007