Why Wheaton Precious Metals Stock Looks Undervalued Despite 100% Move
Despite doubling from its March lows of 2020, at the current price of $43 per share, Wheaton Precious Metals stock (NYSE: WPM) is still quite undervalued and has the potential to offer healthy returns to its investors. WPM’s stock has rallied from $24 to around $43 off its recent bottom compared to the S&P 500 which saw a rise of close to 70% from its March 2020 lows. WPM’s 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. The remaining portion comes from silver and palladium which have also seen a significant increase in prices. Though the stock is 100% higher than the levels seen at the end of 2017, we believe that this increase is justified. In fact, WPM’s stock is likely to see a significant upside of close to 30% from here. Our dashboard What Factors Drove 100% Change In Wheaton Precious Metals Stock Between 2017 And Now? provides the key numbers behind our thinking.
WPM’s revenues increased by over 2% during the 2017-2019 period. However, the increase in stock price was mainly driven by the rise in the P/S multiple from 11x in 2017 to 15x in 2019. This was due to the sharp rise in gold prices and with the company diversifying by entering into palladium mining in 2018. Though the multiple shot up further in 2020 and currently stands at over 22x, it is not expected to record any further major rise in the near future. But that is not going to lead to a drop in the price as higher revenues are likely to provide further upside to the stock.
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 increased from about $1,500/ounce at the beginning of 2020 to close to $2,000/ounce in August 2020. Prices have seen some volatility over recent months and dropped to around $1,850/ounce currently due to lifting of lockdowns and expectations of faster economic recovery. But the gold price is still significantly above the levels seen just before the pandemic. Following the New San Dimas agreement, the company has increased its focus on gold. The share of gold in WPM’s total revenue increased from 50% in 2017 to 63% in 2019. The current crisis has so far helped WPM with better price realization for gold as well as silver. This was reflected in the Q2 and Q3 2020 results of the company where WPM revenues marked a y-o-y growth of 31% and 37%, respectively. Higher revenue was driven by healthy growth across all its three segments – gold, silver, and palladium.
As the global economy opens up and lockdowns are lifted in phases, supply constraints are likely to ease, which will drive higher production and shipments. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Despite the recent volatility, outlook for prices of precious metals remains bright, driven by a recent spike in Covid-positive cases and a weak dollar. With commodity prices remaining high, the company’s revenue is set to register a healthy growth in 2020 as well as 2021. Higher revenues and an elevated P/S multiple will drive the stock further. As per Trefis, Wheaton Precious Metals valuation works out to $55 per share. This reflects a potential upside of close to 30% from its current level.
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