Cameco shares are at multi-year lows. Should you buy?

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At the beginning of the week in these pages, my colleague Scott Barlow shared the investment wisdom of Charles Brandes, who said value investors pay "in time" for stocks, meaning they must be prepared to wait many years for a payoff.

Which brings us quite naturally to uranium and Cameco Corp., the world's largest miner of the stuff.

In April, 2015, investors were warming to the outlook for uranium, sending Cameco's shares up 20 per cent in the process. In reviewing the renewed enthusiasm, I wrote "the caution lights of the spotty uranium market and the company's tax troubles suggest Cameco shares may hit a few bumps in the next year or two during its ascent."

The only part of that sentence that was wrong was the word "ascent"; the shares are down around 40 per cent since. The company's disastrous July 28 earnings report underscored the challenges in the uranium market and Cameco's own woeful performance, helping the stock set a new 52-week low. And while bulls still see a long-term thesis of renewed uranium demand, and a revitalized Cameco along with it, the earnings report contained enough red flags to suggest the stock will likely remain moribund well into 2017.

Cameco CEO Tim Gitzel said the company's second-quarter earnings reflected "the toughest quarter in the toughest market we've seen in the last decade." Deliveries of U308, the uranium compound, were 4.6 million pounds, a decline of 37 per cent from the prior year and 22 per cent from the prior quarter, and well below analyst estimates, noted Orest Wowkodaw of Scotia Capital Inc. The Street had also expected, on average, earnings per share of 12 cents; Cameco reported a loss of 14 cents instead. The stock dropped 11 per cent on the news, hitting a 52-week low, and hasn't recovered. (It closed Friday at $12.54.)

Here, for those long-term investors willing to endure short-term pain, is the bull case: Edward Sterck of BMO Nesbitt Burns' U.K. affiliate writes the stock's decline was "an overreaction to a quarter that appeared weak when viewed on its own, but is not unusual when considered in the context of typical seasonal sales variation." Cameco didn't change its full-year sales guidance, he notes, meaning what was absent in the second quarter should emerge in the next two earnings reports. Cameco is "well-placed" for the current price environment, he says, with cash flows protected by long-term contracts; he has an "outperform" rating and $17 target price, reduced from $20.

David Talbot of Dundee Capital Markets calls the recent stock decline "a knee-jerk reaction" and that removing non-cash and one-time items from Cameco's results would have put the company much closer to expectations. He advises investors not to expect a repeat of events, saying that sales should spike in the second half, Cameco's contracts provide a 60-per-cent premium to spot prices and another 25-per-cent decline in uranium prices in a single quarter is "unlikely." The company operates three of the best uranium mines in the world, he says, and the cost of sales is falling as the company produces from its most-efficient mines.

Meanwhile, Morningstar rates Cameco as just one of 13 stocks in its coverage universe of more than 900 that has a five-star rating, its highest mark. With a "fair value" estimate of $18 (U.S.), versus Friday's NYSE close of $9.52, the stock is "meaningfully undervalued," writes David Wang.

However, Cameco's earnings report also provided an additional cautionary note: The company had a customer with a "take-or-pay" agreement for uranium which chose to pay $47-million and escape the contract, presumably because it preferred not to continue paying Cameco prices above the spot market. While Mr. Gitzel said it was a "one-off" event, even analysts with buy ratings are expressing concerns that it may not be.

"While Cameco does receive cash to be recognized as revenue in [the third quarter], it is unlikely that the utility in question paid more up front than what it expected to save by terminating the contract," wrote Rob Chang of Cantor Fitzgerald, who has a $17.95 (Canadian) target price. "This means that Cameco may be receiving less value for the cancelled contract than if it were able to deliver the uranium according to the contract's terms. If more utilities begin cancelling contracts, Cameco's future cash flows may not be as well supported as initially thought."

Meanwhile, the company is continuing a long-running tax dispute with Canada Revenue Agency, with the matter slated for an October trial and possible 2017 resolution. The case relates to Cameco's use of a Swiss subsidiary to sell Canadian uranium, which allowed it to shift profits away from higher-tax Canada. Cameco is required to submit a portion of the disputed amount to the CRA, so several hundred million dollars of its possible exposure has already been reflected in the company's asset value. The total liability could be about $2-billion, or more than $4 per share – which looks worse for a $12 stock than for a $22 stock.

"We believe that the tax dispute is only somewhat priced into the shares," says Mr. Wowkodaw of Scotia Capital, who has a "sector perform" rating and $13 target price. He estimates Cameco will eventually pay a total of $1.05-billion to the Canadian government, which represents $1.43 a share in current dollars. If Cameco loses in full, it would add another $1.70 a share to the impact. (Cameco has expressed confidence in its position in the matter and believes it will prevail.)

All of this adds up, unsurprisingly, to a stock that's trading at earnings multiples even lower than after the 2011 Fukushima nuclear disaster in Japan. That discount drives a great deal of the bullish sentiment. But Credit Suisse analyst Ralph Profiti, who's neutral on the shares, uses his modelling and figures Cameco's stock price implies a uranium price 33-per-cent higher than current levels – actually making the stock more expensive than it's been, on average, in the last five years.

To return to Mr. Brandes's theory of paying in time: Cameco investors may have quite a wait before the shares come close to the levels of just a year ago.