(By Kevin Donovan) Like the butler's nose ruined by too much silver polishing, the investment community's schnozzola got all out of joint over first quarter results released by Silver Wheaton (SLW) yesterday. The silver streaming company announced record revenues and growing earnings but the latter fell short of estimates, sending the stock tumbling 7.7%.
We think it was an overreaction. Indeed, the stock appears poised to bounce back today. In pre-market trading, the shares are up 1.8% to $24.84, after dropping to a 52-week low during trading yesterday. We would accumulate shares at this level and beyond. Our price target is $35, based on the price of silver recovering to that level, the midpoint of its 52-week range, in the next six months as economic recovery spurs manufacturing demand and inflation heads higher. If that occurs, Silver Wheaton's unique dividend formula would add to returns (more on this later).
The Canadian company reported earnings per share of $0.41 vs. $0.34 last year on revenue of $199.6 million, up 26% vs. the same quarter last year. The consensus estimate for earnings was $0.44 per share.
Simply put, Silver Wheaton is a bank, not a mining company. For an upfront fee of about $4 per ounce, the company buys the right to a percentage of silver production from the guys who actually dig the stuff out of the ground.
And management expects its financing for miners, many of them base metal producers who find silver as a byproduct will remain in demand.
In a press release, CEO Randy Smallwood noted: "While there continues to be a strong trend of expanding capital needs in the mining industry, challenging global financial markets have made access to traditional forms of capital, such as debt and equity, much more difficult,. In this environment, Silver Wheaton's streaming model offers a particularly attractive funding solution for mining companies, and we continue pursuing value-enhancing acquisitions."
Obviously, cash flow and earnings is tightly tied to the price of silver. Silver for July delivery declined 54 cents on the Comex yesterday to $28.35 an ounce, the lowest for a near month contract since Dec. 30. We reiterate, however, we expect demand for the metal to rise as manufacturing recovers and the world's central banks remain firmly on the side of easy money.
Based on its current agreements, Silver Wheaton expects silver inflow of about 27 million silver equivalent ounces, including 16,500 ounces of gold, in 2012. It projects annual attributable production to increase to approximately 43 million silver equivalent ounces, including 35,000 ounces of gold, by 2016. Silver Wheaton does not hedge its silver production. A detailed review of Silver Wheaton's business can be found here.
Silver Wheaton's dividend fluctuates each quarter based on tits operating cash flow. The quarterly dividend is 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. It is currently $0.09 per share.
In sum, we believe the tarnish is fleeting and would be buyers of Silver Wheaton at these levels.