Is It Worth Buying Silver Wheaton?

Source: Thinkstock

Source: Thinkstock

Last Thursday, Silver Wheaton (NYSE:SLW) reported its fourth-quarter and full-year earnings for 2013. The stock didn’t really react with shares down just $0.10 or 0.4 percent, although don’t let this reaction fool you. The results were spectacular. While profits were down due to lower silver and gold prices, the company reported 22 percent growth in its attributable silver equivalent ounces (that is silver ounces plus gold ounces translated into silver.) This makes Silver Wheaton one of the fastest growing companies in the precious metals space, and it also makes Silver Wheaton the fastest growing royalty and streaming company.

Silver Wheaton makes its money by making payments to mining companies in exchange for the right to purchase an agreed upon amount of silver or gold for an agreed upon price.  In every case these prices are substantially lower than the current market prices for silver and gold. Specifically, in 2013, the company reported cash costs of $4.12 per silver ounce and $386 per gold ounce. As a result, the company is extremely profitable, which makes the stock especially desirable among those in the precious metals space.

We see this profitability in the company’s recently released numbers. The company reported 2013 profits of $375.5 million versus $586 million a year earlier. The decline is due to the sharp decline in precious metals prices. Nevertheless, if we compare Silver Wheaton’s profits with most mining companies, we find that Silver Wheaton fared substantially better during the downturn in silver and gold prices. Many companies saw the price of gold and silver reach, or even breach, their costs of production. Furthermore, since many of these companies assumed that gold and silver prices would be substantially higher when designing their mines, most of them took significant write-downs on the carrying values of their properties, and this took a toll on their reportable earnings.  Silver Wheaton shareholders did not suffer these sorts of losses.

Nevertheless, Silver Wheaton shares are down about 20 percent over the past year. This is a steep loss compared to the S&P 500, which was up nearly 20 percent, but still Silver Wheaton outperformed silver, which was down 30 percent over the same timeframe. Longer term, however, we see a different picture emerge. Silver Wheaton shares have been among the best performing publicly traded stocks that I follow. Since they first started trading in the U.S. in the summer of 2005, Silver Wheaton shares are up nearly 700 percent, and at their peak in 2011 they were up as much as 1,200 percent! This speaks to the company’s ability to generate value and the general success of the royalty and streaming business model.

With the stock trading at 23.6-times trailing earnings, I think there is a lot of upside potential. While this P/E ratio is slightly higher than that of the S&P 500, we have to keep in mind that while several S&P 500 companies are struggling to grow their profits, Silver Wheaton should be able to grow theirs rapidly assuming the silver price stabilizes. Profits should, in fact, soar — assuming that the price of silver rises.

Investors looking for a low-risk way to play the precious metals market should seriously consider adding Silver Wheaton shares to their portfolios. Not only is the company profitable and growing its profitability, but it is paying a dividend that is correlated to its cash-flow. This means that, in effect, Silver Wheaton is paying a silver and gold dividend; if silver and gold prices rise so will the company’s cash flow, and by extension its dividend.

So far this year the stock is up 25 percent, and given that silver is up just 5 percent, there is potential for a pullback. This pullback should be purchased — while there will be short-term volatility in the precious metals markets and in Silver Wheaton shares, the company has proven its ability to generate shareholder value over the long run, and I think those investors who buy the stock in the coming weeks will be very happy that they did five years from now.

Disclosure: Ben Kramer-Miller is long Silver Wheaton.

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