After sifting through countless small caps and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the torrid growth pace that can be found with small caps, but their businesses are often well-established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don't have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.
Here is last week's inaugural choice:
This week I want to highlight the second-largest silver company in the world, Silver Wheaton (NYSE: SLW ) .
What it does
As much as I'd like to describe its business model as, "making money hand over fist," it's probably best if I describe how it makes money hand over fist. Silver Wheaton derives all of its revenue from 14 long-term silver purchase agreements and two long-term precious-metal purchase agreements with various companies throughout the world. Now onto the best part ...
How it stacks up
Thanks to the long-term agreements, Silver Wheaton's average cost per ounce of silver during its most recent quarter was $4.14. Compare this to the company's average selling price of $34.21/ounce for the 4.9 million ounces of silver it sold, and you'll probably need to reread this sentence just to make sure this isn't too good to be true. But, I assure you, these figures are real and so is Silver Wheaton's insane leverage to rising silver prices.
Need more evidence that Silver Wheaton is the most profitable company in the world, as fellow Fool Christopher Barker has dubbed it? How about a 105% increase in second-quarter revenue over the year-ago period, a 137% increase in cash operating margins, a 151% increase in cash flow from operations, and, finally, a 181% increase in net earnings. In short, the higher silver goes, the higher these already ridiculous figures are going to go.
However, being in the silver sector doesn't always guarantee profits. Silver Wheaton is the clear standout among some of its closest peers:
Operating Margin (TTM)
Free Cash Flow (TTM)
|Coeur d'Alene (NYSE: CDE )||8.4||18.20%||86M|
|Hecla Mining (NYSE: HL )||10.8||0.30%||158M|
|Endeavour Silver (NYSE: EXK )||812.8||27.00%||13M|
|Silver Standard Resources (Nasdaq: SSRI )||17.6||12.70%||(70M)|
|MAG Silver (AMEX: MVG )||N/M||N/M||(21M)|
TTM = trailing 12 months.
MAG Silver and Silver Standard Resources are both burning through cash, while Hecla Mining is running on razor-thin margins. Endeavour is finally turning the corner, but at 813 times forward earnings, is not exactly a cheap play. This leaves us with Coeur d'Alene, which trades at a much lower forward multiple than Silver Wheaton, but Silver Wheaton's operating margins are nearly three times as much as Coeur d'Alene's. See why it's the clear standout now?
How it could make you money
As long as physical silver prices remain steady or continue to move higher, Silver Wheaton is going to make money. With long-term purchase agreements in place that dictate extremely cheap purchase prices, Silver Wheaton is literally booking hundreds of millions of free cash flow beyond the $4.14/ounce mark. With expenses low, the sky is the limit on this company's profitability.
Don't forget Silver Wheaton's dividend. Right now, at 0.3%, it may not be much to look at. But as operating cash flow begins to pile up and the company looks to deploy its cash, don't think shareholders will get left out in the cold. It's just a matter of time before this dividend explodes higher.
The slow demise of the U.S. dollar also plays an important role in Silver Wheaton's prosperity. Uses for physical silver are projected to grow dramatically over the next decade, but don't downplay the hedge factor silver plays against the notion that the dollar is heading lower.
Silver Wheaton has ridiculous leverage in the mining sector, and for that reason easily finds itself among the 10 large caps to rule them all.
Can you afford not to own Silver Wheaton? Share your thoughts in the comments section below and consider adding Silver Wheaton to your stock watchlist.