Loren Thompson - BWXT Becomes The Nuclear Industry's Civil-Military-Commercial Growth Company

The nuclear energy industry has not fared well in popular culture of late, but there are some facets of what it does that are genuinely indispensable. Nuclear propulsion provides Navy aircraft carriers and submarines with unlimited range. Nuclear power plants remain a crucial part of the electric grid. And nuclear propulsion of spacecraft may be the safest, most affordable way that NASA can put U.S. astronauts on Mars.

Lynchburg, Virginia-based BWXT has learned how to meld these diverse markets into an expanding enterprise combining strong margins and cash generation with a record backlog, in the process becoming the domestic nuclear industry's most outstanding growth story. BWXT not only is the sole provider of naval nuclear reactors, it is also the largest manufacturer of commercial nuclear components in North America, and a key provider of nuclear fuel to civil, military and commercial users.

Over the last ten years, BWXT (a modest contributor to my think tank) has consolidated much of the U.S. and Canadian supply chain for nuclear technology in a streamlined enterprise that dominates the product life cycle from research to engineering to manufacturing to servicing to decommissioning. Because its skills are unique, its position in the marketplace is nearly unassailable, and the results are reflected in its financial performance: E.P.S. and revenues were both up 17% year-over-year in the first quarter.

CEO Rex Geveden thinks the good news is likely to continue. This week I sat down with Geveden in BWXT's Capitol Hill office to discuss the company's success, and where it may be headed. What emerged was the story of an enterprise that combines disciplined capital allocation with an unmatched grasp of its home industry to fashion a visionary strategy for nuclear's future. Geveden isn't bashful about his company leading the nuclear sector -- he says it is a "blessing" to have such a clear corporate identity. He goes on,

We are probably the most prolific nuclear company in the free world. We're delivering 2.4 reactors every year. Who's making that many reactors anywhere in the world?

Investors have warmed to this story since the power generation business was spun off in 2015. In fact, BWXT's market cap has doubled during the intervening two years as Geveden and his predecessors educated Wall Street to the fundamentals of their business. He says that focusing the enterprise on high-margin nuclear activities made it easier for analysts to grasp what previously had been a more complicated, multi-industry story.

BWXT nuclear technology gives the U.S. Navy's aircraft carriers unlimited reach and endurance. -Wikimedia

BWXT nuclear technology gives the U.S. Navy's aircraft carriers unlimited reach and endurance. -Wikimedia

Some facets of that story are arcane, but the financials are compelling. The revenues of its Nuclear Operations Group, which provides about 80% of total sales, reached a record level in 2016 (as did backlog), and look likely to keep growing as the pace of naval nuclear construction expands. Geveden says margins in the "high teens" are sustainable going forward as manufacturing revenues gradually grow and the services portion of the business continues to generate sizable return on invested capital.

BWXT's most recent investor presentation states that "the company anticipates EPS CAGR in the low double digits over the next 3-5 years based upon our robust organic growth story and remaining balance sheet capacity." The latter phrase refers in part to the fact that Geveden's team continues to search for acquisition opportunities that can strengthen its already dominant role in the sector.

That role isn't likely to be challenged because demand from its Navy customer can't sustain two players, even though the reactors and fuel BWXT provides are essential to the Navy's warfighting strategy. Although submarine production may expand to three boats per year in the next decade, and carrier work may accelerate, it isn't feasible or affordable to have two sources of unique nuclear components. Simply qualifying a second workforce and supply chain -- most employees hold security clearances -- would be prohibitively expensive.

The Navy has instead opted for a rigorous pricing and acquisition process that ensures its sole provider of reactors will remain financially healthy. Because reactor construction and refueling of nuclear warships is a long-cycle business, company stakeholders and shareholders have unusual visibility concerning future operations. So management is free to pursue acquisitions and adjacencies secure in the knowledge that its core business is stable, with significant potential for long-term growth.

The main discriminators that Geveden's team applies to any new opportunity are whether it satisfies demanding financial metrics and whether it fits with the company's core competency as a nuclear enterprise. This is largely about preserving what Geveden describes as BWXT's "supreme competitive positioning."

 

We are happily well positioned in every one of the major markets in which we participate...We're not positioned in commodity businesses to any extent.

And Rex Geveden intends to keep it that way. For instance, the company tries to steer clear of dealing with nuclear waste, and although it is teamed with major construction companies in managing the environmental remediation of federal nuclear sites, it is not likely to get into the commercial decommissioning business. What Geveden's team seeks is opportunities where the company's unique skills and experience are "differentiators" for military, commercial and civil customers -- differentiators justifying respectable margins.

Geveden notes that the businesses BWXT has acquired in recent years are "super sticky" because they are in long-cycle market segments where incumbents cannot be easily removed. But the company's corporate culture makes removal unlikely in any event, because as he puts it, "there is a very strong sense of commitment to the mission in BWXT culture -- almost a sense of duty." In that regard, the company's culture, stretching back to the days when it was called Babcock & Wilcox, is a good match for its Navy and NASA customers.

BWXT will be announcing additional initiatives in pursuit of new opportunities later this year. Management is not discussing what those new initiatives might entail, but based on its past track record, three things are certain: they will be nuclear-related, they will be profitable, and they will contribute to the future success of an enterprise that has become the domestic nuclear industry's most outstanding growth story.