A year and a half after Nordion Inc. was thrust into an identity crisis, the medical isotope provider’s stock has recaptured its former glow.
Since losing a crucial legal fight with its own supplier, Atomic Energy of Canada Ltd. (AECL), the stock has made a full recovery, and then some, rising by 80 per cent since September, 2012, to reach its highest share price in more than five years.
A rally like that insists on a re-evaluation.
And while there may still be good arguments for investing in Nordion, its stock is no longer the crisis-weakened, oversold shoo-in it once was.
“I think management is still doing a lot of good things,” said Jason Whiting, vice-president of Trimark Investments. “But it’s much closer to a sell than a buy.”
Credit is due to those investors who saw value in Nordion even after a bombshell arbitration decision wiped out almost 40 per cent of the company’s value 18 months ago.
The company, which is in the business of processing isotopes for medical procedures, was seeking $1.6-billion in compensation from AECL for cancelling construction of the proposed twin Maple nuclear reactors in 2008. The project was supposed to replace the aging and unreliable National Research Universal (NRU) reactor, securing a new source of isotope supply for Nordion.
Prior to the legal defeat, Nordion was a sound dividend play yielding around 4 per cent. Immediately after, the company cancelled the dividend and soon after announced a “strategic review” to assess the future of the company.
Dividend investors bailed, as did those who were banking on an arbitration windfall.
“Both of those shareholder bases sold with no regard for value. Over time, a new shareholder base came in,” Mr. Whiting said.
Those investors saw value in the company’s other lines of business, including sterilization technologies for medical devices. Amid all the uncertainty, that segment remains Nordion’s stable, low-growth cash cow.
Meanwhile, the company sold off its targeted therapies division last year for $200-million (U.S.). Nordion’s cash hoard, which has since grown to more than $300-million, is where the company’s strength resides.
That money is denominated in U.S. dollars but held by a Canadian entity, meaning big currency gains as the loonie has weakened. That effect was the biggest contributor to a first-quarter earnings beat.
More importantly, much can be done with that kind of cash. The company could look for acquisitions. Or it could reinstate the dividend. Shareholders still don’t know what kind of company Nordion wants vermto be.
The most recent earnings call gave no new insight into the strategic review. Whatever the outcome, the future doesn’t look great for reactor-based isotopes.
“We assign no value to the medical isotope reactor segment, given concerns around its viability post 2016,” Stephanie Price, an analyst at CIBC World Markets, said in a note.
AECL plans to shut down its old reactor in 2016, forcing Nordion to look for a new supplier. But the few reactors in the world producing the required isotope are of similar age to NRU, and most are locked into existing supply agreements, Ms. Price said.
Plus, the industry is moving toward safer alternatives to technologies like Nordion’s, which requires weapons-grade uranium.
Last week, CIBC downgraded Nordion’s stock to “sector underperformer” based on the rally in share price.
Nordion could very well rise further once it unveils its grand plan. “Management has created value in the past and they might do it again in the future,” Mr. Whiting said.
They might, they might not. The question for investors is whether it pays to wait and see.