Is Now the Time to Buy Fresnillo?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Fresnillo  (LSE: FRES  ) to determine whether you should consider buying the shares at 1,930 pence.

I am assessing each company on several ratios:

Price/Earnings (P/E): Does the share look good value when compared against its competitors?

Price/Earnings to Growth (PEG): Does the share look like a good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend cover: Is the dividend sustainable?

So let's look at the numbers:

Stock

Price

3-year EPS Growth

Projected P/E

PEG

Yield

3-year Dividend Growth

Dividend Cover

Fresnillo

1,930p

155%

30

N/A

3.2%

380%

1

The consensus analyst estimate for next year's earnings per share is $1.05 (down 5%) and dividend per share is $0.59 (down 43%).

Trading on a projected P/E of 30, Fresnillo appears significantly more expensive than its peers in the mining sector, who are currently trading on an average P/E of around six. Unfortunately, Fresnillo's P/E and negative near-term earnings growth rate give a negative PEG ratio, which cannot help with my analysis.

Supporting a 3.2% yield, the dividend is slightly above that of the mining sector average. However, the company is forecast to reduce its dividend payout this year as it holds back cash for capital expenditure. Indeed, the 2011 dividend was only just covered by earnings.

Fresnillo is expensive, is this justified?
Fresnillo has seen some explosive historic growth, although I believe near-term growth has stalled and the company's shares currently look expensive. Fresnillo's three-year EPS growth rate is impressive, although the company saw the majority of this growth during 2009. In particular, I can see that last year's growth rate was closer to 10%, and this year Fresnillo's earnings are set to fall.

That said, the group continues to deliver a solid operating performance. This year's gold production is set to achieve a new record of 375,637 ounces -- a 15% increase on 2011 -- and the company expects gold production to advance a further 75% by 2018.

However, Fresnillo is actually the world's largest silver miner and is also targeting a 650% increase in silver production by 2018. 

It should be noted that, as Fresnillo operates within Mexico, its operating costs are expensed in Mexican pesos. However, the company reports earnings in U.S. dollars and I can see that a strong peso, combined with rising costs in Mexico, has unfortunately reduced profitability for the group.

Anyway, even though Fresnillo is the world's largest silver producer, I believe the company's slowing growth does not justify the high premium placed on the stock. So, with falling near-term earnings, I believe now does not look to be a good time to buy Fresnillo at 1,930 pence.

More FTSE opportunities
Although I feel now may not be the time to buy Fresnillo, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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