Geoff Gannon February 25, 2019

BWX Technologies (BWXT): A Leveraged, Speculative, and Expensive Growth Stock that Might be Worth It

BWX Technologies (BWXT) has been at the top of my research pipeline for a while now. I wrote about the company – when it was the combined company that is now split into BWXT and Babcock & Wilcox Enterprises (BW) – a few years back. You can read my report on the combined Babcock & Wilcox in the Singular Diligence archives. Today, I’m not going to talk about the business – which is described in great detail in that report (see the “Stocks A-Z” tab). Instead, I’m going to talk about price.

I’ve talked before about how I need to check off 4 points about a stock. One: do I understand it? Two: is it safe? Three: is it good? And four: is it cheap? If a stock clearly and definitively fails any of these 4 criteria – it’s not something I’m going to want to buy. Since I wrote a report on Babcock a few years back – and since BWXT is the part of the old, combined Babcock I felt I understood best – I definitely think BWXT is something I can understand. I also think it’s a high enough quality business. The big concern with safety is debt. The company does not have an investment grade credit rating. However, the business itself is very safe and very predictable. So, analyzing the debt load is really just a matter of arithmetic. You can judge that part as well as I can. The more interesting question is price. On the surface, BWXT does not look cheap. It has almost never looked cheap. And so: the quickest way to disqualify this stock would be to show that it is, in fact, too expensive to consider at $53 a share.

BWXT had a missile tube issue last year. The stock price declined. And it hit a low around the start of this year. The stock has since rebounded though. We can look at the year-to-date return in the stock as an indicator of how much more expensive it’s gotten. The stock started 2019 around $39 a share. As I write this, BWXT is at $53 a share. So, it’s 36% more expensive. Obviously, the market as a whole has done well in January and February. But, it hasn’t done anywhere near as well as that. So, we’re talking about a substantial rebound in the stock price here. I had put BWXT on my research pipeline before that rebound. So, the question is: at $53 a share, is BWXT too expensive for a value investor to even consider?

The company has debt. And, normally, I’d start with an enterprise value based price metric (like EV/EBITDA or Enterprise Value / Free Cash Flow). However, I’m trying to eliminate BWXT from consideration here. I strongly believe the business is a good, safe (when debt is kept manageable), predictable business. It might be worth a very high multiple of EBITDA, free cash flow, etc. So, starting with something like EV/EBITDA might give us an inconclusive …

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