MIR - Mirion Technologies: A Good Way To Diversify Uranium Sector Exposure

2023-12-27 11:03:52 ET

Summary

• I invested in Mirion during a time when the sentiment was low, but the thesis was simple.
• Mirion's products have a crucial role in the nuclear industry and have minimal downside risk. Its addressable market is growing and its products have a moat.
• Through a combination of acquisitions and organic growth the company has been seeing consistent growth in its topline.
• The stock price could benefit from multiple catalysts: organic revenue growth, in its segments, growing outlook, and changing sentiment for the nuclear industry.
• I continue to rate this as a Buy.

I took a position in Mirion (MIR) a little over a year ago, at a time when sentiment for SPACs was at all-time lows. It is still at all-time lows. In fact, once the interest rates started to drift higher the whole SPAC mania came crashing down, and it does not look like the sentiment will turn around any time soon. Hard to believe, but there were some opportunities in this heap that made sense for an investment. But it was definitely a challenge to find them among the hundreds that landed in public markets.

I got lucky with finding Mirion. I separated the noise and invested in the business for what it is and the service it provides for the nuclear industry. The thesis was simple.

Amid the ongoing shift towards clean energy, the challenge of establishing reliable baseload generation necessitates a significant reliance on nuclear energy. Mirion's products play a crucial role in supporting the entire industry, positioning the company to capitalize on any positive industry catalysts. With well-diversified offerings spanning industrial and medical segments, the downside risk was minimal. Its products remain essential, ensuring their continued use irrespective of short-term market sentiments. Essentially, this is a " Pick-and-shovel play ", an investment strategy that allows one to be part of the underlying technology needed to produce a good or service instead of in the final output.

The thesis and the investment have worked out quite well. The stock is up more than 30% since my call and a rare candidate that is up since its de-SPAC. In this write-up, we will examine why this continues to be a good investment.

Business model, Addressable market, and the ongoing upswing in nuclear energy

Mirion Technologies, Inc. operates in the radiation detection, measurement, analysis, and monitoring products and services industry. The company has two segments: Medical and Industrial. The Medical segment offers radiation oncology quality assurance and dosimetry solutions, patient safety solutions for diagnostic imaging and radiation therapy centers, and radionuclide therapy products for nuclear medicine applications.

Addressable Market for Medical Segment

World Nuclear Association ("WNA") reports that over 10,000 hospitals globally utilize radioisotopes in medical applications. Approximately 90% of these applications are for diagnostic procedures, contributing to over 40 million medical procedures conducted worldwide each year. The WNA also estimates that the use of radioactive substances, or radiopharmaceuticals, in diagnosis is growing at over 10% per year.

Industrial Segment

The Industrial segment addresses critical radiation safety, measurement, and analysis applications, providing personal radiation detection, identification equipment, and analysis tools. Mirion Technologies serves a wide range of customers, including radiation treatment facilities, laboratories, military organizations, government agencies, industrial companies, power and utility companies, and reactor design firms.

Addressable Market for Industrial Segment

1. According to the WNA, there were approximately 220 operational nuclear research reactors in 53 countries, with 11 more under construction and 16 planned to be built.
2. Under the new build market for nuclear energy, are 58 reactors in construction, and 445 are planned/proposed. Shutting down reactors is also an addressable market which means equipment needed for decommissioning and dismantling, and the estimate is that more than 50 reactors will be shut down in the next several years.
3. 500 environmental radiochemistry laboratories worldwide

Out of the overall 17 segments the company serves, its products have a leadership position in 14 of them. Installed base drives recurring revenue, its products have high switching costs, and the complexity and the strict standards their products should meet create barriers to entry which means a wide moat . The company has also expanded through its M&A strategy and has acquired 15 companies in the last 7 years.

With the changing sentiment towards nuclear energy, Mirion's business will only serve to grow over the long term.

Growth

• Revenue grew more than 20% in the last 12 months compared to the same period a year before (17% QoQ growth). The medical segment showed the least amount of growth

• They have a record backlog that has been growing for the last 5 quarters. The latest quarter has a backlog growth of 11% and an order growth of 46% compared to Q3 2022.

• Guidance is for revenue growth of 8 - 10%.

Valuation

When looking at Mirion Technologies' valuation, we can consider the EV/Sales and P/S ratios as the company is not yet profitable.

Both ratios have grown significantly over the last year which may indicate growing investor confidence in the company's prospects. The growing outlook on the Uranium sector may have also lent a helping hand. But keeping all of this aside how does this compare when looking at it through the lens of the industry it operates in?

The valuation seems fair for the Price-to-Sales ratio but could seem slightly overvalued in the EV/Sales metric.

A year ago when I analyzed this company, as I mentioned earlier, sentiment was at all-time lows and the stock had taken a beating. This meant the company was trading at a discount compared to its peers and its own valuation history rewinding to its de-SPAC. Growth guidance was around 4%.

Now the ratios are higher but the growth guidance is also higher (8-10%) and debt is around 15% lower. So I like the direction we have been going in If the stock price doesn't get ahead of itself we can also expect to see this trending down as the company continues its growth trajectory and continues to work on its debt. So, all said and done, I believe the market is pricing this fairly.

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

-Warren Buffett

Where is the profitability?

If there is a risk to this thesis, it would be my concern about the company's profitability. The company's continued use of adjusted metrics with a lack of clear direction on actual profitability is something I find an issue with. Some of the reasons for the continued lack of profitability are non-operating expenses, including a loss on the disposal of a business, goodwill impairment, a rise in interest expense, and foreign currency exchange. But even though some of these can be dismissed as non-recurring what I would like to see is improvement in their operating margins. In that regard, there is an upward trend here but we still have ways to go.

The company also has a positive operating cash flow for the LTM, which alleviates some of my concerns with their profitability (Some of the greatest businesses of our generation have been able to grow by prioritizing cash flows over profitability)

Additionally, the company has maintained a cash balance of $100M and has reduced its net debt to $614M, a reduction of 22% from the comparable quarter. Its debt-to-equity ratio is below 0.5, current ratio and quick ratio are at 2.2 and 1.4 respectively. So, for now, even with the lack of profitability I do not see concerns with its cashflows or its balance sheet, and I am not ringing the alarm bells as of yet. But I would be watching this more closely.

A pathway to profitability would involve cutting costs to improve operating margins, but at the same time, it could come off as short-sighted, especially if the current focus is on growth and the long-term vision. I think it is a trade-off at this point. If I continue to see the company put better growth numbers with positive cashflows, I am ready to wait longer for profitability.

Final Call

My analysis and outlook of this company benefitting from the Uranium sector have only strengthened, and it is also supported by the increased growth guidance that I am seeing now versus then. I also believe this is one of the safe ways to play the sector (Miners have their own pitfalls and energy companies do not provide the growth profile) and the moat of the company provides another layer of safety in this investment. Additionally, it could be a wonderful way to diversify your exposure to the volatility of the Uranium sector. I continue to rate this as a Buy.

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