Wheaton Precious Metals Stock Doubled But Is Still Below Potential

by Trefis Team
Wheaton Precious Metals
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Despite an impressive rise of more than 100% in Wheaton Precious Metals’ stock (NYSE: WPM) since its March lows of this year, at the current market price of $50, we believe WPM has still some potential upside from here. WPM’s stock has rallied from under $25 as on 18th March to around $50 on 7th September 2020, a rise of a little over 100% as against S&P 500 which increased more than 50% during this period. WPM’ stock was able to beat the broader market due to a sharp rise in gold prices during the current pandemic, which benefited the company, as over 60% of its revenue is contributed by gold, with the remaining portion coming from silver and palladium which have also seen increase in prices. Though the stock is almost 140% higher than the levels seen in the beginning of 2018, over two years ago, we believe that this increase is justified and, in fact, WPM’s stock could see a marginal upside of close to 10% from here. Our dashboard What Factors Drove 140% Change In Wheaton Precious Metals Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

WPM’s revenues increased by over 2% during 2017-2019 period. This was offset by almost a 9% decline in profitability as net income margins dropped from 33% in 2017 to 29% in 2019. Lower margins reflected higher exploration costs per ton. On a per share basis, earnings declined 11% from $0.63 in 2017 to $0.56 in 2019, as shares outstanding increased marginally by 1% during this period.

But WPM’s stock still continued to increase as the primary factor behind the rise in stock price is the increase in the company’s P/E multiple from 34x in 2017 to 53x in 2019. This is mainly due to the sharp rise in gold prices and with the company diversifying by starting palladium mining in 2018. Though the multiple shot up further in 2020 and currently stands at over 90x, there is a slight downside for WPM’s P/E multiple when compared to the levels seen in the past years. But that is not going to lead to a drop in price as higher earnings are likely to provide further upside to the stock.

Trigger and Timing of Upside?

A slowdown in economic and industrial activities and expectations of a global recession, following the outbreak of coronavirus this year, has increased gold’s value as a hedging instrument. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to well over $1,900/ounce currently due to higher demand. Following the New San Dimas agreement, the company has increased its focus on gold in place of silver. The share of gold in WPM’s total revenue increased from 50% in 2017 to 63% in 2019. Thus, the current crisis has so far helped WPM with better price realization for gold as well as silver. This was reflected in the recently released Q2 2020 results of the company where WPM revenues came in at $248 million, marking a y-o-y growth of 31%. Higher revenue was driven by 34% increase in gold revenue, 25% increase in silver revenue and 31% increase in palladium sales.

There are signs of lifting of global lockdowns over recent weeks which is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

The gradual lifting of lockdowns and easing of supply constraints is likely to boost shipments in the next few quarters. Additionally, with commodity prices remaining at elevated levels, WPM’s stock is expected to rise further by around 10%. As per Trefis, Wheaton Precious Metals valuation works out to $55 per share. With such formidable performance, see how WPM has managed to outperform Barrick Gold in the precious metals’ space.

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