Options Trade – Silver Wheaton Corp. (USA) (SLW) 
Tuesday, March 19, 2013

Silver Wheaton To Bounce Back!

**OPTION TRADE: Buy the SLW Sep 2013 30.000 call (SLW130921C00030000) at or under $3.00, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $6.00.

by Ian Harvey

March 19, 2013

Introduction

When seeking new compelling candidates for our options portfolio, there are lots of different numbers that can be assessed -- price-to-earnings ratios, debt-to-equity ratios, free cash flow, etc.

To narrow this field I looked for companies with:

• A market capitalization of at least $300 million -- this includes many small companies but not tiny ones.

• Revenue growth over the past five years of at least 10%. -- this is a good measure because it's hard to grow your bottom line if your top line isn't growing.

• Earnings-per-share (EPS) growth over the next five years expected to be positive -- because why aim for companies expected to experience shrinking EPS?

• Net profit margins of more than 15%. Net margins reflect how much of each dollar of revenue is retained as earnings.

Obviously, with these numbers in mind, the latest economic news must be taken into consideration – in this case – Cyprus. As well as this – sentiment and the “fear factor”—are starting to come into play!

Silver Wheaton Corp. (USA) (NYSE: SLW) fits this category quite nicely. It sports a five-year average annual revenue growth rate of 39% and a net profit margin of 73.3%. This precious metals specialist's business model is rather beautiful, as instead of being involved in relatively risky and capital-intensive mining, it simply buys the rights to income from mines in exchange for financing. It has many investors excited recently, too, with a new deal it struck with Vale for rights to big chunks of Vale's gold production at two mines -- and management is very bullish, thinking there's a big chance that the mines will overproduce.

Company Overview

Established in 2004, Silver Wheaton has quickly positioned itself as the largest precious metals streaming company in the world. The company has a number of agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver and/or gold production, at a low fixed cost, from high-quality mines located in politically stable regions around the globe.

Based upon its current agreements, forecast 2013 attributable production is approximately 33.5 million silver equivalent ounces, including 145 thousand ounces of gold. By 2017, annual attributable production is anticipated to increase significantly to approximately 53 million silver equivalent ounces, including 180 thousand ounces of gold. Other than its initial upfront payment, Silver Wheaton typically has no ongoing capital or exploration costs, and the company does not hedge its silver or gold production.

Silver Wheaton’s industry-leading growth profile is driven by the company’s portfolio of low-cost and long-life assets, including streams on Barrick’s Pascua-Lama project, Hudbay’s Constancia project, and Vale’s Salobo and Sudbury mines. The company’s unique business model creates significant shareholder value by providing leverage to increases in the price of silver and gold, while reducing the downside risks faced by traditional mining companies. Silver Wheaton has an experienced management team with a strong track record of success and is well positioned for further growth.

Key Statistics for SLW

Current P/E Ratio (ttm) 19.5256
Estimated P/E(12/2012) 18.0237
Relative P/E vs. SPTSX 1.2430
Earnings Per Share (USD) (ttm) 1.5600
Est. EPS (USD) (12/2012) 1.6890
Est. PEG Ratio 0.6147
Market Cap (M CAD) 11,031.72
Shares Outstanding (M) 354.38
30 Day Average Volume 2,247,041
Price/Book (mrq) 3.6257
Price/Sale (ttm) 14.2814
Dividend Indicated Gross Yield 0.90%
Cash Dividend (USD) 0.0700
Last Dividend 11/19/2012
5 Year Dividend Growth -
Next Earnings Announcement 03/21/2013

The Chart

Silver Wheaton remained flat at $30.40 during trading on Monday. Silver Wheaton has a 1-year low of $22.94 and a 1-year high of $41.30. The stock’s 50-day moving average is currently $33.46.

The company has a market cap of $10.770 billion and a price-to-earnings ratio of 19.49.

During 2013 (up to date), shares of Silver Wheaton tumbled down by 15.7%. In comparison, the price of silver declined by 4.5%. The iShares Silver Trust (SLV) declined by 5.3%. Therefore there is plenty of room to run!

Earnings Report

Silver Wheaton is expected to report Q4 earnings on March 21. Here's what Wall Street wants to see:

Comparing the upcoming quarter to the prior-year quarter, average analyst estimates predict Silver Wheaton's revenues will grow 33.6% and EPS will grow 17.1%.

The average estimate for revenue is $256.3 million. On the bottom line, the average EPS estimate is $0.48.

Revenue details

Last quarter, Silver Wheaton reported revenue of $161.3 million. GAAP reported sales were 13% lower than the prior-year quarter's $185.2 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details

Last quarter, EPS came in at $0.34. GAAP EPS of $0.34 for Q3 were 11% lower than the prior-year quarter's $0.38 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.
Recent performance

For the preceding quarter, gross margin was 86.7%, 190 basis points worse than the prior-year quarter. Operating margin was 73.6%, 430 basis points worse than the prior-year quarter. Net margin was 74.2%, 130 basis points better than the prior-year quarter.

Looking ahead

The full year's average estimate for revenue is $818.6 million. The average EPS estimate is $1.66.

Acquisition of VALE

Until the financial reports come out it's worth noticing its latest acquisition. Silver Wheaton completed its agreement to acquire from Vale S.A (VALE) 25% of the life mine and the gold production in the Salobo Mine and 70% of the gold production of its Sudbury Mines. This agreement will slowly raise Silver Wheaton's exposure to gold from 12% to nearly 25% by 2018.

The Effect of the FOMC Meeting

One of the main factors that helped rally the price of silver in recent years were the actions taken by the FOMC to jump start the economy by expanding its balance sheet. This action to expand the U.S. money base led to a rise in demand for safe haven investments.

The main event of this month will be the FOMC meeting that will be held on March 19th and 20th. Depending on what Bernanke says we may see a sharp rise in silver prices again.

Analysts Take

Analysts at Scotiabank lowered their price target on shares of Silver Wheaton from $53.00 to $50.00 in a research report issued to clients and investors on Monday.

SLW has been the subject of a number of other recent research reports. Analysts at TheStreet reiterated a “buy” rating on shares of Silver Wheaton in a research note to investors on Wednesday, February 27th. Separately, analysts at Macquarie upgraded shares of Silver Wheaton from a “neutral” rating to an “outperform” rating in a research note to investors on Wednesday, February 13th. Finally, analysts at Credit Suisse upgraded shares of Silver Wheaton from a “neutral” rating to an “outperform” rating in a research note to investors on Wednesday, February 6th. They now have a $49.00 price target on the stock, up previously from $47.00.

Fourteen equities research analysts have rated the stock with a buy rating, one has assigned an overweight rating, and one has given a hold rating to the stock. The stock presently has a consensus rating of “buy” and an average price target of $48.75.

Analyst Firms Making Recommendations

B OF A M L CANACCORD GENUI
CIBC WORLD MKTS DUNDEE SECURIT.
GMP SECURITIES JP MORGAN SECUR
MACQUARIE CAPIT RAYMOND JMS LTD
RBC CAPITAL SALMAN PARTNERS
SCOTIABANK UBS

Conclusion

The best way to play silver for most investors is probably the SLV ETF, but there are other options. Silver Wheaton, the silver streaming company, has a market-leading 800 million ounces of reserves. The company buys the production of various miners at a fixed, predetermined price, giving it significant leverage to changes in the price of silver. Unlike miners such as First Majestic (NYSE: AG) and Pan American (NASDAQ: PAAS) , Silver Wheaton isn't exposed to mounting production costs and environmental concerns. Last quarter, First Majestic led the industry in cost control and still faced significant declines. Pan American came under even more pressure with higher costs. Overall, Silver Wheaton and the SLV look most attractive under current conditions.

If you're looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008 and also has increased competitive advantages over its limited peer group.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the SLW Sep 2013 30.000 call (SLW130921C00030000) at or under $3.00, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $6.00.



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Options traders win because they are successful.



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