One of the cheapest stocks in our All Investable Stock Screener is Fortuna Silver Mines Inc (NYSE: FSM).
Fortuna Silver Mines Inc (Fortuna) is a Canadian-based precious metals producer. Its business operations are comprised of mining and related activities in Latin America, including exploration, extraction, and processing of silver-lead, zinc, and silver-gold, and the sale of these products. The company operates the Caylloma silver, lead, and zinc mine in southern Peru and the San Jose silver and gold mine in southern Mexico.
A quick look at Fortuna’s share price history below over the past twelve months shows that the price is up 20%, but here’s why the company remains undervalued.
The following data is from the company’s latest financial statements, dated March 2018.
The company’s latest balance sheet shows that Fortuna has $218 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $40 Million in total debt. Therefore, Fortuna has a net cash position of $178 Million (cash minus debt).
Financial strength indicators show that the company has a Piotroski F-Score of 7, an Altman Z-Score of 5.63, and an Beneish M-Score of -2.81. All of which illustrate that the company remains financial strong.
If we consider that Fortuna currently has a market cap of $889 Million, when we subtract the net cash totaling $178 Million that equates to an Enterprise Value of $711 Million.
If we move over to the company’s latest income statements we can see that Fortuna has $117 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.08, or 6.08 times operating earnings. That places Fortuna squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Fortuna generated trailing twelve month operating cash flow of $81 Million and had $45 Million in Capex. That equates to $36 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 5%.
In terms of Fortuna’s annualized Return on Equity (ROE) for the quarter ending March 2018. A quick calculation shows that the company had $563 Million in equity for the quarter ending December 2017 and $577 Million for the quarter ending March 2018. If we divide the combined total of both numbers by two we get $570 Million. If we consider that the company has $67 Million in net income (ttm), that equates to an annualized Return on Equity (ROE) for the quarter ending March 2018 of 12%.
In summary, Fortuna is trading on a P/E of 13.3, which is considerably lower than its 5Y average of 38.94**, and an Acquirer’s Multiple of 6.08, or 6.08 times operating earnings. The company has a strong balance sheet with a net cash position of $178 Million. Financial strength indicators show that Fortuna has a Piotroski F-Score of 7, an Altman Z-Score of 5.63, and an Beneish M-Score of -2.81. The company also generates a FCF/EV Yield of 5% (ttm) and has an annualized return on equity of 12% for the quarter ending March 2018. All of which indicates that the company remains undervalued.
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