I am reaffirming BWX Technologies (NYSE:BWXT) with a positive risk/reward rating based on its timeliness given the recessionary macroeconomic environment, its portfolio diversification attributes, visibility into the future, discounted valuation, asymmetric potential return profile, and its multitude of company-changing growth opportunities.
This update is an extension of my prior report which offers greater detail and serves as a foundation for the BWXT investment case: BWXT is leading the nuclear technology renaissance. Please note that I structure these reports to serve as an extended framework and decision support tool for approaching each company through time. As a result, each report builds on the prior work which I highly recommend for greater context.
Risk/Reward Rating: Positive
The Russian war is shining a spotlight on the world’s energy and security vulnerabilities. This follows closely on the heels of the COVID pandemic which illuminated critical supply chain fragilities. Each of these events plays directly to the strengths of BWX Technologies.
In terms of the energy transition, each of the above vulnerabilities further degrades the sustainable value proposition of many alternative energy sources. Relying on solar and wind as the primary strategic energy pathway creates national security risks. This is due to the intermittent nature of the energy output and the overreliance on foreign supply chains for critical materials. As a result, governments and industry alike are beginning to acknowledge that nuclear energy remains the most promising and sustainable energy source given its zero-emission nature and proven reliability.
Advanced Nuclear Reactors: Mobile Microreactor
The resistance to nuclear energy is largely due to well publicized events such as Fukushima, Chernobyl, and Three Mile Island. Two of the three were bona fide disasters and, while two is an exceedingly small number given the long history of nuclear power, they serve as a powerful reminder of the risks.
The extreme disaster risk is being greatly reduced by advancements in nuclear energy technology and BWX Technologies is an important contributor to this increasingly promising effort. In fact, the recent Project Pele contract win with the US Department of Defense’s Strategic Capabilities Office highlights BWXT’s important role. The following quote from a Department of Defense press release captures the strategic importance not only for the United States, but for the commercial sector globally (emphasis added).
Advanced nuclear power has the potential to be a strategic game-changer for the United States, both for the DoD and for the commercial sector…
Speaking directly to the commercial market opportunity is the following quote from the Department of Defense press release (emphasis added).
As a High-Temperature Gas Reactor using High-Assay Low Enriched Uranium (“HALEU”) Tristructural Isotropic (“TRISO”) fuel, Project Pele is a fourth-generation nuclear reactor, which can serve as a pathfinder for commercial adoption of such technologies…
The following slides from the Department of Defense’s March 2020 Project Pele Overview solidify the strategic importance of advanced nuclear reactors for the United States and its long-term energy strategy in both the government and commercial sectors. Please note that I have added a header above the slides to highlight the importance of each. The titles of the slides are as follows:
- TRISO Fuel: A Paradigm Shift For Nuclear Power
- Advanced Nuclear Reactors Are Already Here
- Whole of Government Approach
TRISO Fuel: Paradigm Shift In Nuclear Safety
BWXT is the only U.S. company to manufacture irradiation-tested uranium oxycarbide TRISO fuel using production-scale equipment.
Russia and China: The Competition Has Advanced Nuclear Reactors
Whole of Government: National Security Priority For Commercial & Government Sectors
In terms of the Department of Defense opportunity alone, the DoD uses approximately 30 terawatt-hours of electricity per year (and this is growing). The Project Pele mobile microreactor will be in the 1-to-5-megawatt range. Capturing a tiny fraction of the DoD’s 30 terawatt hours of electricity use per year alone represents a company changing opportunity for BWX Technologies.
BWXT is expected to generate $2.2 billion of sales in 2022. For comparison, the Project Pele total contract value is $300 million, for which BWXT is the prime contractor. Partners on the contract include leading defense and manufacturing firms such as Northrop Grumman (NYSE:NOC), Aerojet Rocketdyne (NYSE:AJRD), Rolls-Royce LibertyWorks, and Torch Technologies, Inc.
For a glimpse of the potential, if the entire DoD’s electricity needs were satisfied with such microreactors, the units required would be in the range of 6 to 30 million. While this is an unrealistic assumption, it serves to highlight the opportunity size across the global government and commercial sectors using the DoD as a reference point. Regarding the $300 million per unit figure, the unit costs will come down substantially if volume production is reached as the figure covers the startup costs and extreme inefficiencies of manufacturing a single unit.
The Project Pele reactor will be designed to be transported by truck or transport plane, with a setup time of three days and a lead time of seven days if the reactor is to be transported elsewhere. With a continuous runtime duration in the range of three years, the applications and opportunities created by such a technology are quite vast.
For example, with global demand for industrial metals expected to soar in response to the energy transition, mobile microreactors would be a game changer for the economics and environmental impact of mine development and operation. The same can be said of water desalinization plants which consume incredible amounts of energy in meeting the growing demand for fresh water, which is increasingly in shorter supply. As a final example, the electrification of transportation and industry is an incredible opportunity and natural use case. One can easily envision mobile microreactors being an integral part of a sustainable and agile charging and industrial power network.
The following slide from my previous BWXT report summarizes the visible opportunity set in advanced nuclear power. Notice that the mobile microreactor opportunity in the military sector (the first on the slide) is the largest in terms of potential units. The Project Pele win bodes well for BWXT’s success in capturing this immense market opportunity. Volume production could begin in the 2026-to-2027-time frame.
The other applications (the last on the slide) opportunity is the second largest by potential unit sales. I suspect this category could become the largest in the future as it includes commercial adoption of advanced nuclear reactor technology. Potential commercial adoption would naturally follow military adoption and the removal of national security concerns surrounding widespread commercial use.
Finally, as discussed in the prior report, BWXT is working with NASA and the DoD on space-based applications in the field of propulsion and general power supply. Space-based opportunities necessarily entail lower unit demand than do terrestrial applications. That said, the optionality and potential that nuclear energy technology brings to space is likely to prove invaluable if humanity is to become a space-based civilization. From an investment perspective, the space-based opportunity has the potential to ignite the imagination of the investment community and create excitement around BWXT’s innovation and growth potential.
Nuclear Medicine: Radioisotopes
In addition to advanced nuclear reactor technology, BWXT has a second company-changing opportunity in nuclear medicine. The nuclear medicine market is expected to grow from $6 billion in 2020 to $30 billion by 2030. The following slide from my prior BWXT report summarizes the estimated nuclear medicine total addressable market. Note that the therapeutics market (the grey bars) is expected to grow 33% per year through 2030 which is BWXT’s current target market.
The national security and supply chain vulnerabilities for nuclear medicine are on full display in a recent press release announcing BWXT’s agreement with Canada’s particle accelerator center, TRIUMF (emphasis added):
There is much excitement around targeted alpha therapeutics, which may in the future offer hope to patients where previously no hope remained. We anticipate being the first company to produce non-Russian sourced high purity Ac-225 at semi-scale, starting this summer (2022).
– Martyn Coombs, president, BWXT Medical
Kathryn Hayashi, CEO of TRIUMF Innovations, went on to state the following (emphasis added).
This agreement represents a key and complementary initiative to our strategy to increase the supply of Ac-225, commonly known as ‘the rarest drug on earth…
With the nuclear therapeutics market expected to grow by 33% per year through 2030 and the fragile supply chain situation for critical radioisotopes, the market opportunity is exceptional for BWXT. The following passage from my prior report summarizes my projections based on BWXT’s existing product plans and excludes any new nuclear medicine opportunities, for which there are many.
I view the 33% CAGR expected for the therapeutics side of the market to be a realistic growth expectation for BWXT’s nuclear medicine business in the second half of the decade. If this growth can be achieved, BWXT’s nuclear medicine business could reach $832 million in sales by 2030 and could produce $3.30 per share of EBITDA.
For reference, BWXT is expected to earn $3.14 per share in 2022, which includes minimal nuclear medicine sales and losses in the nascent medical division. With global instability and supply chain vulnerabilities front and center, there is good reason to view the above quote as a moderate estimate for the nuclear medicine business with substantial upside potential into 2030.
Furthermore, with a total market opportunity expected to be near $30 billion by 2030, the $832 million revenue estimate in the above quote represents only 2.8% market share. This level of market share appears to be a very conservative estimate given the realities of the nuclear industry.
Nuclear technology is a specialized and highly regulated industry which limits new entrants and therefore competition. One can easily imagine BWXT achieving a multiple of my estimated 2.8% market share by 2030. If this were to transpire, the nuclear medicine business would become a game changer for BWXT given its estimated $2.2 billion of revenue in 2022. The following two slides from my prior report highlight the most notable nuclear medicine opportunities for BWXT currently.
Growth Summary: Advanced Reactors & Nuclear Medicine
The advanced nuclear reactor and nuclear medicine markets each represent company-changing opportunities for BWXT through the end of the current decade. Today, these two markets are immaterial to BWXT’s business aside from lowering its profitability as a result of the startup nature and upfront costs associated with these nascent sectors.
One can easily envision each opportunity surpassing the size of BWXT’s current core businesses in naval nuclear propulsion, commercial nuclear power, and nuclear site management services. The recent Project Pele win and Ac-225 radioisotope news discussed above affirm that BWXT is successfully executing on its roadmap for these immense growth opportunities.
Nuclear propulsion for the US Navy (submarines and aircraft carriers) is BWXT’s largest market with the greatest visibility long term. While historically a stable and reliable business, here too there is growth potential resulting from recent geopolitical tensions with China and Russia.
The company’s largest business designs, engineers, and manufactures precision naval nuclear components, reactors, and nuclear fuel for the US government. In fact, BWXT is the only manufacturer of nuclear reactors and fuel for the US Navy. As a result, BWX Technologies is a mission-critical company for the US government. The following images are from my prior report. They demonstrate the visibility into long-term demand resulting from this mission critical, sole supplier status.
In the first image, you will notice that BWXT has demand visibility out to 2049 for its three active Navy shipbuilding platforms. The number of companies in the world with this type of visibility is exceedingly small. While Navy schedules are not etched in stone, the above timeline is highly likely to be a good approximation of the future given the planning horizons involved (which is displayed in the second image). Please note that the build time for each ship is between five and eight years. Additionally, these programs are critical to national security which supports a high confidence level in the visible demand. The US government accounts for roughly 70% of BWXT’s total revenue which includes non-naval work.
Regarding the growth potential of the core naval business, there are increasing opportunities with US allies that are not currently factored into BWXT’s financial forecasts. For example, AUKUS is a trilateral security pact between Australia, the United Kingdom, and the United States for the Indo-Pacific region. The agreement was announced on September 15, 2021, and entails the US and the UK working with Australia to acquire nuclear-powered submarines.
This agreement aligns perfectly with BWXT’s core US naval capabilities and may lead to upside surprises in its base business through the end of the decade. Given the unfolding multipolar world and the increasing tension and competition with China and Russia, BWXT’s prospects for long-term growth in its core defense business look excellent. The likelihood of more robust defense spending by the US and its allies over the coming decade is rapidly increasing.
Commercial Nuclear Power
On the commercial front, BWX Technologies is a leading supplier of nuclear fuel, fuel handling systems, tooling delivery systems, nuclear-grade materials, precisely machined components, and related services for CANDU nuclear power plants. CANDU stands for Canada Deuterium Uranium and is a nuclear reactor design used in Canada since the 1950s.
BWXT is the only North American designer and manufacturer of large component nuclear equipment. Like the US Navy example, BWXT is the sole supplier of important components and know-how to the CANDU market and is the number one supplier overall. Additionally, BWXT is one of only two manufacturers of fuel in the Canadian market. These historical moats are likely to grow wider over time as a result of increasing global supply chain constraints, growing global demand for nuclear components, and national security concerns. The following slide from my prior report summarizes the CANDU market opportunity.
The two revenue categories in the CANDU market are recurring revenue and life extension work. Here again BWXT has excellent sales visibility with 40+ years of recurring revenue and 10+ years for power plant life extension projects. The CANDU market accounts for roughly $350 million or 16% of sales. When added to the 70% of sales from the US government business discussed above, fully 86% of BWXT’s core business offers exceptional, multi-decade visibility with increasing upside potential.
It should be noted that the Canadian government plans to have the first advanced SMR or Small Modular Reactor connected to the grid by 2028. Small modular reactors are one of the most exciting growth areas for BWXT and fall under the “other applications” category in the advanced nuclear programs slide above. The company’s expertise and 60 years of experience in the Canadian nuclear power industry are likely to serve it well when competing for next-generation nuclear power opportunities in the commercial segment.
Considering the exceptional stability and expanding growth potential in BWXT’s core business combined with the company-changing growth opportunities, BWXT represents an enticing investment opportunity in the current recessionary environment. In my Oracle (NYSE:ORCL) report last week, ORCL: Oracle foresees hypergrowth, I made the case that visibility in all of its forms should receive a premium valuation in today’s market. BWXT fits this mold.
Interestingly, BWXT is valued at a substantial discount to the broader market averages which trade in the range of 20x to 44x trailing earnings (S&P 500 and Russell 2000) as per The Wall Street Journal. In the last report, I made the case that BWXT’s core business should be valued more in line with a utility given the mission-critical nature of the business, the stability of the income stream, and BWXT being a sole supplier in many cases.
The Dow Jones Utility Average Index currently trades at 27x trailing earnings. Additionally, with a market cap of only $4.5 billion, the Russell 2000 is a more applicable index for BWXT than is the S&P 500. Compared to the utility average, the Russell 2000, and the S&P 500, at just under 16x trailing earnings and the 2022 consensus earnings estimate, BWXT trades at a substantial discount.
The valuation discount points toward the potential for an asymmetric risk/reward opportunity. Turning to the valuation details, the following table was compiled from Seeking Alpha and displays consensus earnings and sales estimates for BWXT through 2025. I have highlighted the key data points to illuminate what is currently priced into BWXT’s shares.
Notice that sales estimates through 2025 (highlighted in yellow) represent a stable progression at a fairly low growth rate. The consensus estimates through 2025 foresee stability but little in the way of growth. Interestingly, the 3.4% to 4.18% sales growth range is below the 5% growth rate achieved in recent years, which was highlighted in the prior report. In essence, BWXT’s historic growth rate is projected to continue through 2025.
Stable but low growth through 2025 makes sense as BWXT’s company-changing growth opportunities are scheduled to reach or ramp towards volume production beginning in the 2025 timeframe. Looking at the consensus earnings estimate for 2025 (highlighted in blue), BXWT would be trading at 12.6x earnings on the cusp of two game-changing growth opportunities hitting their stride: advanced nuclear reactors and nuclear medicine.
As discussed above, each of the new opportunities could surpass the current size of BWXT’s core business. There is a visible pathway for the nuclear medicine business to roughly double BWXT’s earnings power into 2030 assuming no new product roadmaps, which is unlikely. The advanced nuclear reactor business could easily become the largest opportunity of all if widely adopted by the DoD and US government. If commercially adopted, the growth potential becomes extraordinary.
As a result, it is conceivable that investors today are paying 12.6x 2025 earnings for a company that could have visibility into growing its earnings by many multiples looking out five years hence. Additionally, the news flow regarding advanced nuclear technology adoption both terrestrially and for space applications could become a powerful force in supporting investor psychology and confidence in BWXT. As a result, the potential return spectrum looks to be exceptionally well supported on the downside and relatively unbounded to the upside.
In the prior report, I stated that the investment case for BWXT revolves around two axes. On the first axis is the value of BWXT’s core, wide-moat businesses serving governments and legacy commercial nuclear reactors. The second axis is the incredible long-term opportunity set of disruptive growth vectors in the broad application of nuclear technology. This remains the crux of the BWX Technologies investment case. As can be observed in the current valuation, BWXT is not pricing in the company-changing growth opportunities, let alone the core business.
The technical backdrop mirrors BWXT’s stable but slow growth in its core business, as it is defined by a gradually rising trendline and relatively tight trading range. The following 10-year monthly chart captures BWXT’s trading history. The blue line represents the gradual uptrend, the green light depicts the next major support level beneath the trendline, and the orange lines represent resistance levels.
Notice that BWXT recently bounced off the uptrend line which is acting as strong support and is currently near $46. Additionally, the recent rally stalled precisely at the first resistance level near $54 (the lower orange line). BWXT is currently coiling in a very tight trading range between these two levels. The 5-year weekly chart below provides a closer look at the action since the top near $72 in April 2018.
BWXT has been locked in a sideways trend since late 2017. Interestingly, the technical pattern hints at an ascending triangle pattern, as higher lows are established against fixed upside resistance (the blue line versus the orange lines). This technical pattern carries a bullish interpretation given the higher lows, as the upward sloping blue trend line approaches the horizontal orange lines. In essence, energy for an upside break out is building as the stock coils in a tight range while gradually trending upward.
The blue trendline looks to remain a strong support level while the area near the green line appears to be a worst-case scenario as things stand. In terms of resistance, the first level near $54 should offer minimal resistance given BWXT’s stability, discounted valuation, and exceptional growth opportunities. The all-time high resistance at the top orange line should offer greater resistance. That said, given the strong fundamental backdrop, the top resistance level should remain relatively mild.
Potential Return Spectrum
Before wrapping things up, it is worthwhile to sketch out the potential return spectrum over the nearer term, while largely ignoring the upside potential in the second half of the decade. Given the discounted valuation and strong fundamentals, the technical support levels offer excellent downside scenarios.
On the upside, the technical resistance levels serve as very short-term targets while fundamentally-derived price levels offer more concrete and realistic upside targets. For the fundamental targets, I apply the current market valuations discussed above to BWXT’s 2022 consensus earnings estimate (S&P 500: 20x, the Dow Jones Utility Average: 27x, the Russell 2000: 44x). The following table summarizes the potential return spectrum.
I have highlighted in yellow what I believe to be a high probability potential return spectrum over the nearer term. The utility average valuation of 27x earnings is remarkably close to BWXT’s 5-year average PE of 25.37, which was provided by Seeking Alpha. Given the similarity of BWXT’s core business to a utility, and its historical valuation being similar to that of current utilities, I view the 70% return potential as being quite reasonable in the nearer term.
Looking out to the 2025 timeframe, given the aforementioned growth opportunities scheduled to ramp mid-decade, 35x the 2025 earnings estimate looks realistic (the lower blue highlighted cell). BWXT’s earnings potential could expand by multiples of its existing earnings power through 2030. If the growth plans remain on track, as recent wins suggest, 35x the current consensus estimate for 2025 could actually be viewed as quite reasonable.
BWX Technologies is a perfect stock for today’s recessionary environment. Demand for nuclear technology is accelerating in the energy, defense, and healthcare sectors. Each is uncorrelated with the general economy and interest rates while offering secular growth opportunities.
The secular growth opportunities are exceptional. In fact, the Department of Defense describes the opportunity in advanced nuclear reactors as a strategic game-changer for the United States, both for the DoD and the commercial sector. The advanced nuclear reactor market offers a truly vast and company-changing opportunity for BWXT.
On the nuclear medicine front, BWXT is ramping production to meet well defined near-term opportunities while targeting a therapeutics market that is growing at 33% per year and is expected to reach $21 billion by 2030. With a total addressable market expected to reach $30 billion by 2030, nuclear medicine represents an advanced and company-changing opportunity for BWXT.
BWXT’s timeliness, portfolio diversification attributes, visibility into the future, discounted valuation, asymmetric potential return profile, and vast secular growth opportunities make it a top choice for today and tomorrow’s market.
Price as of this report: $50.20
BWX Technologies Investor Relations Website: BWX Technologies Investor Relations