Post-split, Cameco's a 'buy"
The Investor's Digest of Canada recently published the following excerpt from a research report by analyst Greg Barnes, TD Newcrest.
As previously announced in its fourth-quarter 2005 earnings release, Cameco Corp. (TSX CCO, $41.73, 306-956-6200, www.cameco.com) has split its shares two-for-one.
We view this as positive. Splitting the stock will result in about 349 million shares outstanding. This is likely to increase the trading liquidity and make the stock more affordable for retail investors.
We have adjusted our target price to reflect the stock split at $47 per share, which represents roughly a 20 per cent return to the Feb. 15 close (split-adjusted).
We are increasing our recommendation to "buy" from "hold to reflect the increased return to our target price following recent share price weakness.
We continue to believe that uranium prices are likely to trend higher over the next several years due to tight supply conditions. We are forecasting average uranium prices of US$40 per pound for 2006, US$45 per pound for 2007 and US$50 per pound for 2008.
As of Feb. 15, the shares will trade on the TSX on a split basis and will have started trading on a split-adjusted basis on Feb. 23 on the NYSE. We have adjusted our estimates to reflect the stock split.
For 2006, we are expecting earnings and cash flow of $1.50 and $2.39 per share, respectively. Our 2007 earnings and cash flow estimates are $2.22 and $3.10 a share, respectively.
Cameco currently trades at 26.1 times our 2006 EPS estimate and 16.4 times our 2006 cash flow per share estimate. This compares to its large-cap peer group average of 10.2 times 2006 consensus EPS and 6.9 times 2006 consensus CFPS.
Our target price is based upon a 25 times price-to-earnings multiple to our 2008 EPS estimate for the company's uranium and conversion businesses, plus a 15 times P/E multiple on its share of 2008 earnings from Bruce Power.
We also add the equity value of Cameco's 53 per cent interest in Centerra Gold. We have discounted this valuation back one year at a 10 per cent discount rate.
There are risks associated with the stock achieving our target price and our financial forecasts.
Cameco continues to provide limited guidance with respect to its realized guidance uranium prices. Over the past two years, the company's realized uranium price has been significantly below spot market uranium prices due to pricing terms in existing contracts.
Our forecast of Cameco's realized price could be substantially different than the actually realized by the company.
Because Cameco is primarily a uranium mining and processing company, it faces heightened environmental risks relative to other mining companies.
The company is developing two new mines: the Cigar Lake mine in Northern Saskatchewan and the Inkai operation in Kazakhstan, that could face development cost-overruns or delayed schedules that are inherent in mine construction.
World economic growth and metal prices may not match our forecasts and also pose risks.
Source: Investor's Digest of Canada, 133 Richmond St., W, Toronto, ON M5H 3M8, 1 year, 24 issues, $137.
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