One of the many reasons I'm so excited and so bullish on the nuclear industry is that we are seeing a cycle of innovation - something akin to the industry lifecycle - playing out in the nuclear sector (NASDAQ:NUCL). I believe we are in the early stages of the innovation phase, and are going to see many innovations in nuclear technology that enable the industry as a whole to meet the challenge created by a world demanding more scalable, cost-effective power without fossil fuels. For investors, I believe this will create an abundance of opportunities.
One of the opportunities I'm most excited about - in addition to breeder reactors and uranium sea mining, which I discussed previously - are modular nuclear reactors. These devices have the ultimate effect of making nuclear power feasible on a smaller scale. They have lower upfront costs, and thus have the potential to reach customer segments that were previously locked out of the market due to the high upfront costs required in building a conventional nuclear power plant. Any innovation that enables price reduction so that a new class of customers can participate is a low-end or new market disruption - an opportunity that, if it gains sufficient traction and an innovation cycle of its own, can be the foundation for a much larger transformation in the entire industry. The pioneering writings of Dr. Clayton Christensen are essential reading for those looking to understand how cost-savings innovations transform markets and create outstanding investment opportunities.
The developer of the modular nuclear reactor is Generation mPower, a joint venture between Babcock Wilcox (BWC) and the Bechtel Group. BWC's decades of experience and status as incumbent in the nuclear power industry are what gives me concern; the modular nuclear reactor is a product that needs to find new customers rather than mold itself to conform to the existing industry customers if it is to have a truly revolutionary impact. From this perspective, BWC simply has the wrong DNA to bring a modular nuclear reactor to the market. This is a classic example of what Christensen refers to as "the innovator's dilemma."
For instance, Generation mPower may find it all too tempting to shape the product's innovation road map based on the needs of BWC's current clients, as that is an easy to reach marketing outlet. But doing so may cause the company to fail to reach more compelling market opportunities, such as developing infrastructure in environments of extreme poverty like Nuru International is doing.
Likewise, it may fail to see other emerging trends it can grow with (like solutions by which solar power can complement nuclear during peaking hours - perhaps a strategy to make nuclear even more cost-effective on a small scale). Because of this line of thinking, I'm not totally convinced that BWC is a great opportunity in spite of coming from the viewpoint that modular nuclear reactor technology is a sorely needed technology.
With that said, though, BWC is a company with growing earnings and a P/E ratio of under 19 at the time of this writing - while the average of the S&P 500 is still over 22. I think U.S. equities are headed to all-time highs so there are lots of good opportunities out there, and as an incumbent in the nuclear industry with a market cap of over $3 billion, a case can be made that BWC should be a part of any well-developed nuclear portfolio.
However, it's not the kind of disruptive strategy - which is always what I'm really looking for - that can open up a new market of customers and be a part of an emerging value network. From that perspective, BWC is on my watchlist - but only as one I'll be consider in the event of an extreme drop in price. For growth plays, which is primarily what I'm interested in the stock market for, BWC isn't as compelling as I'd like it to be at these prices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.