Wednesday, May 2, 2012

Lets look at TMX Group (X), trades on the Toronto exchange and is the operator of the Toronto Exchange.
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.
X is a public company that has well known products.
So here we go: for the past 2 years X has had an average P/E trading range of 14.3 (high) and 10.85 (low).

Over a longer term
X had a average P/E ratio of 21.9 (high) and 11.9 (low) over the past 10 years. X has also had some wild swings in the past, P/E values for example in 2005 X had a high P/E ratio of 31.50 and a 4.4 (low) in 2003 .
X has over time has an average annual Earnings growth of 50.23% over the past 10 years and a more consistent growth rate of 13.6% over the past 3 years. For the purposes of this analysis I am using the 3 year average increase to determine what X should be valued at.

Knowing or at least estimating future earnings you can estimate the share price. In this case X should earn about $3.61 in 2012 and using the average P/E the estimated trading range should be 51.68 (high) and 39.21 (low).

Looking at the price per cash flow ratio (P/CF) X has increased it’s CF/S. X’s 10 year P/CF has been in the nose bleed section of 70.2 (high) and 32.3 (low) however the three year average gives a better picture. The last 2 year averages is 12.5(high) and 9.5(low)
X’s CF/S is estimated to raise by 13% in 2012 to 4.02 per share this gives me a share price range of 50.19 (high) and 38.13 (low)

D/S, dividends per share is another method to help in determinating what a reasonable price is to buy X.
Looking at the price per dividend ratio (P/D) X has a range in this area as well. X’s 10 year P/D is 2.62 (high) and 5.2 (low) however the three year averages give a different picture. The 3 year average is 2.86 (high) and 5.42 (low)

X’s current dividend is estimated to raise by 10% in 2012 to 1.76 per share this gives me a share price range of 45.61 (high) and 32.49 (low) with a current 3.5% implies that X is trading below its 3 year averages. I believe that X will have an increase in price in 2012.

Now on to how to trade, as I’m looking to purchase shares of X so I would be writing a put at my price estimates in this case I’m looking to write 2 Put Options at $40 strike price on the  I’m looking to sell them in October 2012, 2-Put contracts for the 40 strike price and collect the premium of $.90 /share. I am also a holder of X and I would also sell my current position at 50-52 range. So I’ll write 2 calls at 50 strike price and collect a premium of $ .90 / share in the same month (Oct).

If your wondering on what the return would be? The Put = 8000 /180 = 2.25% at an annual rate of 4.5% where as the Call would be 8600/180 = 2.09% and 4.18% for the year plus dividends which would make it close to 7.5% for the year. The rent collected is $360 for the 6 months plus any dividends.

*note* there is an offer to buy the TMX group for $50 per share.