Thursday, June 7, 2012

Lets look at Silver Wheaton (SLW) today. It trades on the TSX and on the big board the NYSE. For discussion and to determine the entry and exit points. Using P/E and CF/S
By using the historical P/E ratio and CF/S ratio one can determine what the entry and exit positions should be and I’ll look at the dividend ratio (D/S) for this company.

SLW has been a publicly traded company for more 10 years, SLW is not a direct mining company but (should we say) a company that provides financing for a percentage of production .

So here we go: for the past 3 years SLW has had an average P/E trading range of 42.1 (high) and 16.6 (low). Over a longer term SLW had an average P/E ratio of 40.85(high) and 16.5(low) over the past 6 years. SLW has also had some wild swings in the past, for example P/E values in 2004 SLW had a high P/E ratio of 262.5 and a low P/E ratio 5.0 in the same year. With a current P\E of 17.5 it looks like SLW is on the bottom end of the price range. SLW has over time had an average annual Earnings growth of 68.96% over the past 6 years with some bumps along the way. For the purposes of this analysis I am using the average of a 15% increase to determine what SLW should be valued at.

Knowing or at least estimating future earnings you can estimate the share price. In this case SLW should earn about $1.82 in 2012 and using the average P/E the estimated trading range should be $74.22 (high) and $29.98 (low). Earnings in the first quarter increased by 20%.

SLW is a dividend payer which it started paying in 2010. Over that time SLW has instilled a payout equal to 20% profit from the previous quarter. Lets hope that the increases continue however I don’t see SLW increasing its dividend in 2012. The dividend will remain at .37 per share which is paid quarterly.
SLW’s dividend yield for the past year ranged from .4 (high) to .65 (low). Currently SLW is paying a 1.328% based on its current price $27.87.

Looking at the math for the dividends and working it backwards the dividend would support a share price of $136.51 (high) and 82.48 (low). Talk about the nose bleed section, this goes to show you that using data from a company with a short history can cause issues in the math and can give you a false sense of value. That is why you must use more then one metric when looking at a company.

Looking at the price per cash flow ratio (P/CF). SLW has increased it’s average CF/S by 67.82% over the past 6 years. SLW’s 7 year P/CF ratio range is 33.34 (high) and 14.17(low).

This gives SLW a share price based on a cash flow of $64.19 (high) and $27.27 (low). With todays price of $27.87 it appears to be at the lower end of value. CF/S for 2012 is estimated to be $1.93 per share which is an increase of 10% over 2011.

To sum it up: current price $27.87
P/E bottom of the price range $29.98
D/S is over its top Price range, way to far out of range.
CF/S is above its lowest estimated price range $27.27

With SLW it’s a matter of trying to predict the future price of its finished product, in this case Gold and Silver. Gold today is trading around $1600.00 per once and SLW’s cost is $303.00 per once and Silver is trading $28.55 per once and the cost is $4.08 per once to produce. Based on these prices SLW does have a pretty good margin spread on its two main product lines.

SLW options trades on the www.x-m.ca and on the www.CBOE.com. If you’re an owner of SLW like I am, I’m looking to sell my position at a price that I would be comfortable with so Looking on the CBOE I see that selling the July 30 calls look good. As my purchase price is just under $30 per share. I’m looking to collect a little cash flow from my share, so I’ll write 10 contracts for July with a strike price of 30 and collect the premium of $.81 per share or $810.00 before commission costs. For writing this 6 week contract I'll collected the premium that works out to be about 2.6% or 22.5% annualized plus dividends.