BWX Technologies, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

A specialty manufacturer of nuclear components, a developer of nuclear technologies, and a service provider with an existing legacy of over 150 years in the nuclear industry that operates primarily with the U.S. government, including nuclear fuel, nuclear reactor components, medical radioisotopes, environmental remediation services, and advanced technology.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BWXT’s core business is supplying specialized components and services for nuclear applications, primarily to the U.S. Government.

Business Overview

BWX Technologies (BWXT) operates through two primary segments: Government Operations and Commercial Operations.

  • Government Operations:
    • This segment is responsible for the design, manufacturing, and testing of nuclear reactor components and nuclear fuel for the U.S. Navy’s nuclear-powered fleet.
    • They also provide engineering, design, manufacturing and support services for the U.S. Department of Energy (DOE).
    • Additionally, they work on various government projects, including those for homeland security, medical isotope production, and environmental remediation.

  • Notably, the Government Operations segment provides services and products for the U.S. Naval Nuclear Propulsion Program.

  • Commercial Operations:

    • This segment designs and manufactures nuclear components for commercial nuclear power reactors, such as pressure vessels, steam generators, fuel handling systems, and heat exchangers.
    • It also offers maintenance, repair, and modification services, as well as products related to the nuclear fuel cycle and nuclear medicine.
  • This division also generates revenue from the nuclear fuels, instrumentation & control, components, and design work. * A core focus for the Commercial Operations division is microreactor technologies.

The company is heavily reliant on government contracts, mainly with the U.S. government, which can pose both advantages and risks. Revenue is generally derived from long-term contracts, where project costs are billed to clients, and a margin is earned on top of the total project cost. Some contracts may be fixed-price, cost-plus or variations thereof.

Competitive Landscape

  • The nuclear industry is capital-intensive, with high barriers to entry due to regulatory requirements and technological expertise.
  • BWXT operates in a niche market that requires specialized knowledge and expertise, limiting the number of direct competitors.
  • Key competitors in the nuclear component market include Westinghouse, Framatome, and Korea Hydro & Nuclear Power. But BWXT has a huge advantage with Government projects, due to the established relations and the security requirement. * In the medical radioisotope market, competition includes companies like Cardinal Health and Northstar Medical Radioisotopes. However, it is not a high-barrier-to-entry market.
  • For microreactors, the emerging nature of the business makes competition harder to ascertain at the moment.

What Makes BWXT Different?

  • Long history and expertise in nuclear technologies, which creates strong brand recognition in the industry and ensures high government trust.
  • Strong relationships with the US government and a focus on government-related projects give the company a competitive advantage over competitors with less US government contracts experience.
  • Proprietary technology and advanced manufacturing capabilities for various applications, including nuclear fuel and medical isotopes.
  • A high emphasis on safety and quality, which are paramount in the highly-regulated nuclear industry.
  • Significant barriers to entry into the Nuclear Power Industry create high returns on capital.

Financials Deep Dive

Revenues:

  • The total revenue for 2022 was $2.27B compared to $1.98B in 2021.
  • Government operations contributes ~70% of revenue.
  • Commercial operations account for the remaining ~30%.
  • There is growth in all segments year-over-year.
  • The guidance for 2023 is for operating revenues to be between 2.2 and 2.3 billion.
  • The Nuclear Operation Group revenue for the 6-month period ending June 2023 totaled 846.6 million in revenues, a decrease compared to same period in 2022(871 million in revenues).
  • A large portion of revenue growth is expected from the government operations segment.
  • Revenues are expected to be between $2.25 and $2.30B for 2023.
  • For Q2 2023, Government Operations was at $451.7 million (Q2 2022: $388.5 million) and Commercial Operations came in at $152.6 million ($145 million in Q2 2022)

BWXT benefits from stable long-term contracts with the U.S. government, and while fluctuations can occur within segments or contracts, this provides reliable recurring revenues.

Profitability

  • Operating profit for 2022 is $303 million compared to $260 million in 2021.
  • EBITDA has shown significant growth over the past several years.
  • EBITDA in the second quarter of 2023 was reported at 133.1 million, an increase over $117.9 million of the same quarter in 2022
  • For Q2 2023, Government Operations delivered $54.3 million of profit compared to $55.7 million in the previous year, and Commercial Operations had a profit of $13.4 million compared to $14.5 million in the year prior. Overall adjusted profits increased due to a gain on sale of investments, however on the operational side of the business, profits were down a bit.
  • They are expecting a 13% - 14% Adjusted EBITDA margin for 2023. * In Q2 2023, Adjusted EBITDA margin was 21.6%, higher due to increased financial benefits.
  • The margins have been high historically, and a wide moat is often associated with high margins, and this is what we are seeing here for the most part.

Balance Sheet Health:

  • BWXT had a solid balance sheet as of December 2022, including strong liquidity and long-term debt at $1,244B
  • The interest coverage ratio, measured by EBITDA to net interest expense, has remained quite high at 10.7x in FY 2022. * Interest coverage was around 6X in the 10Q for Q2 2023. * Total debt was $1.3B * Debt to capital (debt divided by debt+equity) is 35.6%

BWXT’s financial position is robust with strong cash flow, manageable debt, and considerable liquidity, suggesting low risk and great financial health.

Moat Rating Justification

Based on my analysis of BWXT, I would rate its economic moat a 3 out of 5, indicating a narrow moat. Here’s why:

  • Intangible Assets (3/5): BWXT does benefit from certain intangible assets like long standing relationships and contracts with the U.S. government, it is also a leader in nuclear technology, however other companies are also competing in the space and its harder to create differentiated advantages that are impossible to imitate.
  • Switching Costs (4/5): The high complexity of operations and technical requirements, combined with government contracts often lasting for many years, result in high switching costs for clients. Customers are also very reluctant to change as it may affect safety and regulatory approvals. That gives BWXT significant pricing power and long lasting relationships.
  • Network Effects (1/5): Network effects are not present in the operations of BWXT. While collaborations and partnerships exist, they do not seem to increase value based on the size of the network.
  • Cost Advantages (3/5): BWXT has a scale-based advantage for its core operations and has some advantages by being vertically integrated and controlling the whole supply chain, but other companies are also quite capable of producing at similar costs. There might also be areas of potential cost disadvantage due to it being in North America, but this is a very technical aspect that is subject to debate.

Legitimate Risks that Could Harm the Moat

  • Dependence on Government Contracts: BWXT’s revenue stream is heavily tied to government budgets and policies, any major shifts in political priorities or government spending could affect its profitability.
  • Technological Disruption: Rapid advancements in nuclear technology could render some of BWXT’s specialized products and services less relevant. While innovation is a key focus for the company, it could face challenges in keeping up with the pace of change.
  • Reliance on Nuclear Power: Opposition to nuclear power could halt or negatively impact some of BWXT’s projects. In turn this would impact revenues.
  • Cybersecurity risks: The business is heavily reliant on government and private data, which could be vulnerable to cybersecurity attacks, a breach in data integrity and confidentiality, or system wide breaches and malfunctions, could severely damage business continuity and finances.
  • Project Execution Issues: As a manufacturing and service provider, BWXT faces risks of delays, cost overruns, and technical problems on its projects. These issues could increase costs and hurt profitability.

Business Resilience

  • Long-Term Contracts: BWXT’s contract base tends to be stable and long-term.
  • Government Support: Government contracts are often associated with high levels of spending that make the operation somewhat more resilient to downturns, compared to purely commercial markets.
  • Critical Infrastructure: Nuclear-related services and products are deemed critical for essential infrastructure, offering greater stability.
  • Microreactor Business Potential: BWXT’s microreactor division has the potential to be a growth driver, but its success is yet to be determined.
  • Medical isotopes: The growing demand for medical radioisotopes can also prove to be a driver of business for the company.
  • Geographic diversification: BWXT is diversified with operations across North America. It is also expanding its international market position.
  • Strategic focus on US government projects: This will also continue to create revenues and stability.

Understandability Rating Justification I would rate the understandability of BWXT as a 2 out of 5 because:

  • A good amount of background knowledge is needed in the different applications of the companies products.
  • Understanding the business from the outside is a fairly complex process.
  • The company works primarily with US government agencies, which requires an understanding of the sector.

Other Relevant Information

  • The CEO, Rex Geveden, has been vocal about making new technologies more important for long-term profitability.
  • The company has been pushing the microreactor technologies.
  • The company has consistently stated their belief in creating long-term value with strong execution on contracts.
  • BWXT has also pushed into new strategic markets, and is pushing into international expansion.
  • The company is also actively pursuing new acquisitions for growth.

Overall, BWXT has a relatively solid and reliable financial performance, an industry that benefits from high barriers to entry, and the management seems to be focused on long-term stability and growth, despite having some risks related to political and macro changes. It may prove a good pick for long-term value investors if the price is acceptable.