Despite a 58% rise inWheaton Precious Metals’ stock (NYSE: WPM) from its March lows of this year, at the current market price of $38, we believe WPM has already reached its near term potential. WPM’s stock has rallied from $24 as on 18th March to $38 on 11th June 2020, a rise of 58% as against S&P 500 which increased 25% during this period. The stock was able to beat the broader market due to a sharp rise in gold prices during the current pandemic, which benefited WPM as over 60% of its revenue comes from gold.
The stock is almost 80% higher than the levels seen in the beginning of 2018, a little over two years ago. Though the current stock price is also 27% over the level at the beginning of this year, we believe that WPM’s stock has peaked for now and is likely to remain around its current level as the world still awaits the sign of abatement of the pandemic. Our dashboard What Factors Drove 90% Change In Wheaton Precious Metals Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.
Some of the rise in stock price in the last 2 years is to a certain extent justified by a 2.2% increase in WPM’s revenues between 2017 and 2019. But this was offset by almost 9% decline in net income as margins dropped from 32.8% in 2017 to 29.3% 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 what actually explains 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 sharp rise in gold prices and with the company diversifying by starting palladium mining in 2018. Though the multiple went up in 2020 and currently stands at 68x, given the volatility of the current situation, there is a slight downside for WPM’s P/E multiple when compared to the levels seen in the past years.
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 almost $1,700/ounce currently due to higher demand. With rising investment in the yellow metal by major central banks and expectations of interest rates heading south, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current Covid-19 crisis.
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 confirmed to a certain extent in Q1 2020, with total revenue rising 13.2% y-o-y. Though global gold and silver prices have increased, this effect is partially offset as the company faces supply bottlenecks due to the lockdown, leading to lower shipments.
However, over the coming weeks, we expect subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which 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 focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.