Areva SA (AREVA.PA) is a French conglomerate that offers technological solutions for nuclear power generation, from mining to building plants, to operating them and even disposing of waste. Nobody ever said the nuclear reactor business was easy. It takes years to get a plant up and running, but Areva’s earnings quality outlook isn’t lighting up any financial forecasts.
Released: November 18 2013
Length: 2 Minutes
Based on a poor StarMine Earnings Quality (EQ) score of 10, it looks like Areva’s profits may not be coming from sustainable sources. Let’s look some of the signals that contribute to the poor earnings quality.
The chart below shows that Areva has seen negative free cash flow for five of the last six semi-annual periods despite net income being negative in only two of the periods. When earnings are supported by strong cash flows, they tend to be more sustainable.
Source: Eikon/StarMine
Earnings go toward debt payments
One reason for the poor free cash flow is that Areva is spending more on capital expenditures that it is generating cash from operations. That is not sustainable in the long run unless the company is willing to take on more debt. Over the last year, the company paid out almost all its operating income in interest expenses (it earned €266 million and paid out €236 million in interest expenses). With close to €6 billion in total debt, the company seems highly levered already.
Source: Eikon/StarMine
Watch operating efficiency
Unfortunately, return on net operating assets doesn’t look much better for Areva. As you can see in the chart below, the RNOA has fallen from 9% just three years ago, to under 1% in the most recent semiannual period. That is a sign of decreasing operating efficiency and may be a cause of concern for future earnings.
Source: Eikon/StarMine
Pension costs
France’s stringent labor laws are thought to be anti-competitive. To that point, archaic pension expenses for the last year accounted for 5.8% of sales at Areva. That is likely to remain another headwind for future earnings. Incidents like the disaster in Fukushima, Japan after the 2011 earthquake and tsunami weaken the demand for nuclear power. That is another concern for future earnings at Areva. Last week, Areva signed a €1.25 billion contract (which extends out to 2018) to finish building a nuclear power plant in Brazil, but that will have to be just the start of many such projects over the next couple of years in order for Areva finally to improve margins, cash flows and earnings quality.
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