Calculating A Proper Valuation For Silver Wheaton

| About: Silver Wheaton (SLW)

With Silver Wheaton (NYSE:SLW) trading at the bottom end of its 52 week range, I decided to take a closer look into the company to see if it is an attractive opportunity for investors. Here are six points I looked at while researching SLW:

Valuation: SLW's trailing 5 year valuation metrics do not have a clear bias as one is above the 5 year average and the other one is below. SLW's current P/B ratio is 4.3 and it has averaged 3.7 over the past 5 years with a low of 1.8 and high of 6.4. SLW's current P/S ratio is 15.7 and it has averaged 18.8 over the past 5 years with a high of 31.1 and low of 9.8. SLW's current P/E ratio is 20.5 and it has traded in a range between 20 and 40 over the past year.

Price Target: The consensus price target for the analysts who follow SLW is $48. That is upside of about 55% from where the stock is currently at. This suggests that SLW is significantly undervalued at these levels.

Forward Valuation: SLW is currently trading at about $31 a share and analysts forecast the company to report EPS of $2.42 next year for a forward P/E of 12.8. Revenues are forecast to jump 37%. This seems like a very cheap multiple based on the expected growth. Publically traded comps include Coeur d'Alene Mines (NYSE:CDE), Pan American Silver (NASDAQ:PAAS), Silver Standard Resources (NASDAQ:SSRI), and First Majestic Silver (NYSE:AG). CDE is trading at about $25.50 a share and analysts expect the company to report EPS of $3.15 next year for a forward P/E of 8.1. PAAS is trading at about $24 a share and analysts expect the company to report EPS of $3.05 next year for a forward P/E of 7.9. SSRI is trading at $14.50 with analysts expecting EPS of $1.00 for the company next year for a forward P/E of 14.5. AG is trading at $18 a share and analysts expect the company to report EPS of $1.79 next year for a forward P/E of 10.1. This suggests that SLW is slightly overvalued compared to other publically traded silver companies as the average of their forward P/E ratios is about 10.2.

Dividend: SLW began paying a dividend in March of last year, which was 3 cents per share for the first 3 quarters, but adopted a new dividend policy in November. The Board of Directors adopted a new dividend policy that links quarterly dividend payments to operating cash flows in the prior quarter. Commencing immediately, the quarterly dividend per common share will be equal to 20% of the cash generated by operating activities in the previous quarter divided by the company's outstanding common shares at the time the dividend is approved, all rounded to the nearest cent.

The company further noted that its revenues are primarily derived from the sale of silver, with its operating cash costs essentially fixed at approximately $4 for every ounce of silver sold. Based on the new policy, the Board of Directors has declared its fourth quarterly cash dividend for 2011 of $0.09 per common share.

Analyst estimates: The company missed analyst estimates the past 3 quarters by decent sized margins as the misses ranged between 4 and 12 cents. This suggests that analysts do not have a good grip on the company and earnings surprises may drive shares higher.

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Price Action: SLW has had a mixed year; it was up more than 38% in early April but has since been trending down and is now down 9% over the past year. It does seem to have found a bottom in the $26-27 range. The stock is below both its 200 day moving average, which sits at $35.19, and its 50 day moving average, which his at $32.02. However, it seems to be making a move to attempt to break the 50 day moving average which has given the stock trouble over the past few months. Resistance on the upside includes $32 and then followed by $37. On the downside, support lies in the $30 area followed by $26-27 range.

Conclusion: Looking at SLW's valuation offers mixed results at these levels but it has a much different cost structure here than the other silver miners that I've covered. Therefore, it may be worth a closer look as all of the silver stocks have been struggling lately. The consensus analyst target price also offers intrigue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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