swk facing a pe of 4 in 12 months time.

Reading today's update is very heartening. The company discloses to shareholders how the change in strategy initiated 3 yrs ago is bearing fruit and will accelerate profits in FY13 and beyond. Swk's main asset is its competitie advanatage. It produces a better performaning machine and lower capex and higher return/metre drilled than their peers. This translates into more contracts being gained.

I have copied an email i wrote to an investing friend on 19/10/12. SP was 26.5c-27c then but readers can adjust. Todays announcement confirms my thinking that by October 2013 SWK will be on a very low PE, along with potential for high yields beyond that.

"Hi Rob
When buying or selling I always look at possible future scenarios. One can never be spot-on but if enough info is at hand one can (i believe)improve the likelyhood of a favourable deal. Part of any planning must consider the risks involved and i'll deal with that issue first.
Founder and MD Kent Swick concedes he has made some big mistakes dating back 5 years. Company expanded in too many directions, margins shrank, debt blew-out etc. Current SP is a fraction of its peak and a CR was needed to keep things going. MD now firmly believes the company
is undervalued by the mkt and has begun a share buyback. In total 15% or some 35million shares are scheduled to be purchased and then cancelled by company. Assuming Kent Swick and board retain their confidence in company's earnings, any shares falling into the 25-26c
zone will be purchased by company. So far about 1.5million have been bought-back. This should provide a cushion to holders when SP falls... but clearly the company would be hurting itself to buy shares, at this level, if EPS suddenly took a bit hit. Is this likely? It's not
inconceivable but most contracts have a 2yr life and i imagine are
pretty watertight. Being with med-large brownfield mines the chances
are the company's income is on firm ground.
If nothing changes over next 12 months we'll have an EPS of 4.14c. At 27c that's a PE of 6.5. Pretty good i agree but not exceptional in a world with such a fragile macro.

But what is likely to change? Let's be optimistic.
A) rate per metre drilled charged to client. I feel rate will largely stay the same although some contracts probably have built-in increase for inflation. Lets say gross return/rig increases 2%/annum.
B) Number of rigs in work. This is crucial. Overhead costs at HQ stay the same whether there are 50,60, 70 or 80 rigs at wk in the field. currently 62 in action. Lets say yr end negoiations in NA are moderately successful and 4 more rigs enter service January CY13. Lets say mine in Portugal loves SWK's wk and 3 more enter service in March
CY13. Plus here in Oz SWK win another 3 contracts. That's 9 extra... an increase of 14.5%.
C) Margins. Another potential gamechanger. Assume the auto-rod handling adaption is a great success. manpower/rig on UG Diamond halves overnight!
But expect change across this part of fleet to be gradual. Difficult to calc exactly but by 2QFY14 we could have a 17% increase in margin.

What's overall effect? 1.02x1.145x1.17=36% increase in EPS.
4.14x1.36=5.63c. At 25c (where most HC readers bought) equals PE of 4.44.
That's more like it. But lets assume by Oct next year we have 10% less shares on issue. PE now 3.99. Even better. Assume 1c ffr div maintained, its paying gross return of 5.68%. Starting to add-up.

But could be better yet again. SWK seems to widening the competive advantage over its peers. It's quiet likely SWK will gain more contracts as they expire at new mines. So lets be bold and add another 3 rigs into wk here in Oz.... equals gain of 4.8%. 5.63cx1.048=5.9c.
Now have PE of 4.23 (at 27c PE=4.58)
Summary: To have a company with low risk and a reasonable possibility of the above assumptions coming into fruition, is worth close consideration imho.

PS. There's actually another very important multiplier that i almost missed. A big cost for SWK is capex and building new rigs. In FY13 cost per new rig forecast (by company) to be 67% of that previously. Lets round it up to 70%. Assuming # of rigs built in CY13=CY12 then we'll see a 30% drop in capital costs by this time next
year. That should add aprox 1.3million to bottom line increasing earnings by 13%. So jump fwd 12 months and now EPS=5.63x1.13=6.36c. Hence new PE at
October 2013 (SP@ 25c)=3.93. (@ 27c=4.25). Not too many companies have a fwd PE of around 4. Chuck-in the fair degree of safety, decent dividend etc., this company warrants a more buying. But bear in mind any company experiencing continuing capex will never have the ROE of a carsales (CRX) or similar. Nevertheless, despite the fragile macro, I'm buying a few more from time to time.
def also dyor and clacs.

PPS. The company has stated that 50% of earnings will be paid out as divs. If FY14 has EPS of 6.3c we can expect a 3c ffr div. At 25c that's 17% gross yield. At 27c=15.8% yield!! Looking like the complete package.