I'm Buying This Small-Cap Energy Stock Now


Just yesterday, I introduced you to five stocks that I consider to be ridiculously cheap. Today, I'm telling you that I'll be buying one of them -- EnergySolutions (NYS: ES) -- for my Roth IRA. This small-cap, underpriced stock isn't getting the respect it deserves. Read on and I'll explain why.

Not exactly an industry with great PR
Make no mistake about it, EnergySolutions is not a sexy stock. The company is in the business of nuclear waste disposal, and its revenue streams can be broken down into three main components.

  1. Waste disposal -- EnergySolutions has two of the three nuclear waste facilities in the United States -- one in South Carolina and one in Utah.

  2. Life-of-plant contracts -- The company holds rights to provide exclusive services at 80 of the 104 nuclear reactors in the United States.

  3. Decommissioning -- This is a relatively new revenue source for EnergySolutions, as they have been contracted to shut down and dispose of the waste at Exelon's (NYS: EXC) Zion reactor site.

A troubled recent history
One of the reasons that EnergySolutions is so attractively priced today is because it has had to deal with a prolonged string of bad news. This began while the company was bidding for the Zion contract. Because of a bungled process and strict deadlines, the company almost blew its debt covenants.

Shortly after -- and possibly because of -- this, founder Steve Creamer left the company, followed soon after by CFO Mark McBride. Adding fuel to the fire, EnergySolutions lost several contracts to renew its business in the U.K. starting in 2014.

Usually, this alone might scare off investors, but then consider EnergySolutions' recent earnings performance against analysts' expectations. In five of the past six quarters, they have missed their prescribed targets, and twice by a wide margin. In the second quarter of 2010, the company was expected to earn $0.06 per share, and instead brought in a loss of $0.32. They followed that up the next quarter, in which expectations called for $0.12 but the company reported a loss of $0.23 per share.

And then, of course, there was the meltdown of the Fukushima plant in Japan. In this, EnergySolutions was not alone in being punished by the market. Take a look at how industry peers like construction company Shaw (NYS: SHAW) , uranium miners Cameco (NYS: CCJ) and Denison Mines (ASE: DNN) have fared since March 11, when the disaster took place.

EnergySolutions Stock Chart
EnergySolutions Stock Chart

EnergySolutions Stock Chart by YCharts

So why am I buying?
After reviewing the sobering recent history at EnergySolutions, I could forgive you for thinking that things look bleak. But the truth is, there's a ton to like about this company, especially at today's prices.

For starters, EnergySolutions has an enormous moat surrounding its core waste disposal system. The barriers to entry are significant. And though Germany famously announced its intentions to stop all forms of nuclear energy production, I simply don't believe -- especially with the growing energy demands of a growing global middle class -- that nuclear energy will be completely abandoned.

Furthermore, one of the reasons earnings have been so bad is that the plants themselves have been allowed to store their waste on-site for certain periods of time. Eventually, however, those plants are going to pony up and pay to get their spent fuel disposed of. When they do, EnergySolutions will be one of the only teams around to help dispose of that waste.

And finally, the company is showing progress in expanding its revenue streams. Just this summer, EnergySolutions announced a joint venture with Babcock & Wilcox (NYS: BWC) and URS (NYS: URS) to operate the U.S. Department of Energy's Advanced Mixed Waste Treatment Project in Idaho.

Considering all of these facts, as well as the fact that the company's forward P/E is 9.44 and price-to-book ratio just 0.57, I have no problem adding shares.

Ideas to whet your energy whistle
Usually, I like buying companies I'd be willing to hold forever if forced to. This isn't one of those cases; I think EnergySolutions is severely mispriced, and I'm willing to wait for the market to take notice. I'll be giving the company a positive CAPScall on my profile until the stock's price matches reality.

If you'd like information about an energy-related company that -- right now -- I would be willing to hold on to for an indefinite time period, I suggest you check out one of our latest special free reports: "One Stock to Own Before Nat Gas Act 2011 Becomes Law." Inside, you'll find out all about a company I already own that's poised to pop from the coming natural gas legislation. The report is yours today, absolutely free!

At the time thisarticle was published Fool contributor Brian Stoffel does not own shares of any of the companies mentioned. He will be buying shares of Energy Solutions when trading rules allow. You can follow him on Twitter at @TMFStoffel.The Motley Fool owns shares of EnergySolutions. Motley Fool newsletter services have recommended buying shares of Exelon, and creating a write covered strangle position in Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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