BWXT - BWX Technologies Q2: Powering Up Or Cooling Down?

2023-08-06 23:25:21 ET

Summary

• BWX Technologies reported substantial growth in Q2, with consolidated revenue reaching $612 million.
• The growth was driven by a 13% boost in government operations and a 2% uplift in commercial operations.
• BWXT's potentially overvalued P/E ratio and upcoming revenue deficits in Q3 warrant a "Hold" rating for investors.

Thesis

BWX Technologies, Inc. ( BWXT ) reported substantial growth in its second quarter, with consolidated revenue ascending 11% to reach $612 million. The move was primarily driven by a 13% boost in government operations and a 2% uplift in commercial operations. However, the company's potentially overvalued P/E ratio and upcoming revenue deficits in the third quarter suggest caution for investors, warranting a "Hold" rating until further developments are observed.

Company Overview

BWX Technologies, Inc., operating in the U.S., Canada, and internationally, delivers a broad range of nuclear components. The firm's operations are divided into Government and Commercial sectors. The former designs and produces naval nuclear components and fuel, alongside converting Cold War-era uranium stockpiles, marking a distinct engagement in the defense, maritime, and environmental sectors. Meanwhile, the Commercial sector flexes its capabilities in nuclear manufacturing, providing everything from nuclear steam generators to medical isotopes. With roots tracing back to 1867 and formerly known as The Babcock & Wilcox Company, BWX Technologies' longstanding presence from its Virginia base underscores its enduring influence in the nuclear industry.

BWX Technologies Q2 Earnings Highlights

BWX Technologies has reported impressive growth in its second quarter, with the firm's consolidated revenue ascending 11% to reach a notable $612 million.

This impressive upsurge - which, at the time of this analysis was being rewarded by the market with a 10% spike in its share price - was primarily catalyzed by a 13% boost in their government operations and a more modest yet still significant 2% uplift in commercial operations.

However, it's worth noting that the company's second quarter adjusted EBITDA witnessed a dip from the previous year. This decline is largely attributable to diminishing margins across both governmental and commercial sectors, along with escalated corporate costs (more on this below in "Risks & Headwinds"). Nevertheless, despite these headwinds, BWX Technologies managed to improve its free cash flow, from $35 million in the preceding year to $41 million, a move largely underpinned by superior management of working capital and a minor reduction in capital expenditures.

Underscoring the firm's commitment to future growth, BWXT has channeled investments into key initiatives designed to drive expansion. Notably, these include the development of its Innovation Campus in Lynchburg, Virginia, a state-of-the-art facility set to house the company's terrestrial microreactor team. According to management, the financing of this venture is anticipated to be fully absorbed by the company's adept handling of its working capital, thereby helping to secure its ambitious objective of accruing $200 million in free cash flow within the year.

Segment-wise, the company's government operations sector witnessed a considerable revenue leap in the second quarter, soaring 13% to an imposing $492 million. This rise can primarily be attributed to an escalation in naval nuclear component production and an uptick in microreactor volume. Commercial operations also saw growth, albeit at a slower pace, with a 2% increase attributed to amplified field service activity within the commercial nuclear business and bolstered BWXT medical revenue.

Looking ahead, BWXT's guidance for the remainder of 2023 adopts an optimistic tone. The company anticipates its revenue to exceed a significant $2.4 billion, which would represent high single-digit growth.

The projected adjusted EBITDA is also slated to witness similar growth rates, estimated to hit around $475 million, even in the face of non-operational impediments such as reduced pension income and an increase in interest expenses.

Lastly, the firm's recent partnership with Terra Power, involving the Natrium demonstration project, underscores BWXT's prominent position in the commercial nuclear market. This collaboration, coupled with the company's robust growth trajectory and financial outlook, should reaffirm for investors BWXT's leadership status in the nuclear technology sector.

Performance

BWX Technologies has been a consistent performer (see data below), with its share price appreciating over the medium-term from $31.77 at the start of 2016 to $68.62 as of August 3, 2023.

The dividend history is particularly impressive. Over the past seven years, BWXT's dividend per share has exhibited an average growth rate of 19.88%, compounded at a rate of 18.82%. This means the company has consistently returned increasing cash to its shareholders, which is a promising sign of its financial health and a potentially bullish future outlook.

When comparing the annualized rate of return (ROR) without dividends, BWXT's 10.68% underperforms the benchmark S&P 500 Index rate of 10.96%. However, when incorporating growth and dividends, BWXT's compound growth rate of 11.72% gets remarkably closer to the S&P's 12.25%. This tells me that while BWXT's growth may not outperform the broader market, the consistent and growing dividend payout makes it an appealing investment for income-focused investors.

Valuation

As of August 3rd, 2023, the data (see chart below) indicated that BWXT's trading activities exhibited a blended Price-to-Earnings (P/E) ratio of 22.89x that surpassed the company's historically typical P/E ratio of 20.51x. From the lens of a value investor, the current elevated P/E ratio might hint towards the stock potentially being overpriced in the market.

An additional point of interest in the data is BWXT's adjusted operating earnings growth rate, which stands at a noteworthy 9.28% represents a healthy rate of growth which strengthens the argument for potential escalation in future earnings. This is a particularly relevant point when considering the aforementioned high P/E ratio. Should the company continue its current trend of substantial earnings growth, the elevated P/E ratio could, in fact, be justified as a reflection of anticipated higher future earnings rather than mere overvaluation.

Risks & Headwinds

In spite of an overall rise in revenue, BWX Technologies faced a dip in its Q2 adjusted EBITDA, declining by 7% year-over-year to land at $107 million. This downturn primarily emanates from diminished margins in both its governmental and commercial sectors, in addition to augmented corporate costs. This pattern seems to hint at a challenge to profitability, even in light of the encouraging revenue growth figures.

Alongside the aforementioned EBITDA decrease, the company's adjusted earnings per share also suffered a downward slide to $0.65 from $0.82 recorded in the equivalent quarter of the previous year. This trend is largely propelled by non-operational elements like diminished pension income and escalated interest expenses. Such factors underscore the financial trials that lie beyond their core operations, which could pose a threat to investor returns.

Looking into the future, the third quarter is predicted to experience another round of lower-than-typical EBITDA margins, specifically in the government operations realm. This projection can be attributed to the challenges related to onboarding inefficiencies and the varying impacts resulting from project mixture and timing on new programs. Additionally, management noted that the third quarter is historically a slower period for their commercial power business due to fewer outage occurrences during the summer months, pointing to possible revenue deficits.

Final Takeaway

Based on the information provided, I would rate BWX Technologies as a "Hold." The company is displaying strong revenue growth, solid free cash flow, and commitment to expansion. However, the concerns about decreasing adjusted EBITDA and higher corporate costs, combined with a potentially overvalued P/E ratio, suggest it may be prudent to wait and see how these issues resolve themselves before making a buying decision. Notwithstanding, the consistent and growing dividend payout is an attractive aspect for income-focused investors.

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