Are You Missing Something Easy at Silver Wheaton?

Margins matter. The more Silver Wheaton (NYSE: SLW  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Silver Wheaton's competitive position could be.

Here's the current margin snapshot for Silver Wheaton over the trailing 12 months: Gross margin is 87.7%, while operating margin is 75.8% and net margin is 88.1%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Silver Wheaton has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Silver Wheaton over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 80.5% and averaged 73.0%. Operating margin peaked at 61.0% and averaged 53.4%. Net margin peaked at 68.5% and averaged 46.9%.
  • TTM gross margin is 87.7%, 1,470 basis points better than the five-year average. TTM operating margin is 75.8%, 2,240 basis points better than the five-year average. TTM net margin is 88.1%, 4,120 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Silver Wheaton looks like it is doing fine.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at Silver Wheaton? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

 


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  • Report this Comment On January 10, 2012, at 7:17 AM, Shanteram wrote:

    Bullish articles, from authors who don't own the stock, are of little value. The author should end the article by explaining why he praises the stock but does not own it.

  • Report this Comment On January 10, 2012, at 2:22 PM, EGTalbot wrote:

    I fail to see why an article that outlines specific variables is of little value. If he said, "Silver is going to skyrocket, buy silver wheaton," then you'd have a poibt. But he specifically said, "With recent TTM operating margins exceeding historical averages, Silver Wheaton looks like it is doing fine."

    This is the type of thing that is plenty valuable. Certainly there may be other reasons not to buy SLW, but he's given you objective positive reasons to at least look further.

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