Friday, May 4, 2012

Lets look at Telus (T), trades on the Toronto and (TU) on the NYSE.
For discussion and to determine the entry and exit points. Using P/E, CF/S and D/S
By using the historical P/E Ratio, CF/S ratio and the D/S ratio, one can determine what the entry and exit positions should be.
T is a public company with known products and services on the telco arena.

So here we go: for the past 3 years T, has had an average P/E trading range of 14.07 (high) and 10.4 (low). Over a longer term T, had an average P/E ratio of 19.75 (high) and 12.48 (low) over the past 13 years.

Telus has over time has an average annual Earnings growth of 14.07% (6 years) and over the past 3 years as had a more consistent growth rate of 8 %. For the purposes of this analysis I am using a 3 year average increase to determine what T should be valued at.

Knowing how to estimate future earnings you should be able to estimate the future share price. In this case T should earn about $4.04 in 2012 and using the average P/E the estimated trading range should be 56.82 (high) and 42.01 (low).

Looking at the price per cash flow ratio (P/CF) T has increased it’s CF/S. T’s 12 year P/CF has had a nice a low ratio with 6.45 (high) and 4.19 (low) comparing it to the 3 year average gives a better picture. The last 3 year averages is 5.37(high) and 3.97(low)

T’s CF/S is estimated to raise by 6 % in 2012 to 9.88 per share this gives me a share price range of 53.05 (high) and 39.26 (low).

D/S, dividends per share is another method to help in determinating what a reasonable price is to buy T.
Looking at the price per dividend ratio (P/D) T has a range in this area as well. T’s 12 year P/D is 2.62 (high) and 4.06 (low) however the three year averages give a different picture. The 3 year average is 4.36 (high) and 5.9 (low)

T’s current dividend is estimated to raise by 10% in 2012 to $2.43 per share this gives me a share price range of 55.71 (high) and 41.19 (low) with a current 4.1% implies that T is trading near its 3 year averages and above its 12 year average. I believe that T will remain flat in price for 2012.

Now on to how to trade, as I’m looking to purchase shares of T so I would be writing a put at my price estimates in this case I’m looking to write a Put Option at $42 on the www.m-x.ca. So I’m looking to sell 2 January 2013 Put contracts for the 42 strike price and collect the premium of $.30 /share. I am also a holder of T and I would also sell my current position at $58-60 range. So I’ll write 2 May calls at 60 strike price and collect a premium of $ .40 / share.

If your wondering on what the return would be? The Put = 8400 /60 = 0.71% at an annual rate of 1.5% where as the Call would be 8000/80 = 1% and 12 % for the year plus dividends which would make it closer to 16 %.