Wheaton Precious Metals stock (NYSE: WPM) is up 75% since its March 2020 lows. At the current price of $42 the stock still appears to be undervalued. WPM’s stock had rallied from $24 to around $56 (its high point in the last one year of the pandemic) off its recent bottom compared to the S&P 500 which saw a rise of close to 90% from its March 2020 lows. WPM’s stock was able to beat the broader market initially 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. However, as lockdowns were gradually lifted and vaccines were rolled out, expectations of a faster economic recovery led to a drop in global gold prices, which in turn saw WPM stock falling from its high of $56 to $42 currently. But, despite at $42 the stock is 120% more than its December 2018 level, we believe it has an upside potential of close to 30% from here. This is because the recent surge in Covid positive cases amidst a second wave has now led markets to believe that economic recovery will take longer than earlier estimated, while continued lower interest rates are driving some uptick in gold prices once again. Our dashboard What Factors Drove 121% Change In Wheaton Precious Metals Stock Between 2018 And Now? provides the key numbers behind our thinking.
The stock price rise between 2018-2020 was driven by increase in WPM’s revenues by 38% during this period. The increase in stock price was also driven by the rise in the P/S multiple from 11x in 2018 to 17x in 2020. This was due to the sharp rise in gold prices and with the company diversifying by entering into palladium mining in 2018. The multiple’s rise to well over 20x at one point in 2020 was again driven by a sharp rise in gold prices during the pandemic. However, with prices falling, the multiple recently dropped from its 2020 high and currently stands at over 17x. As gold prices rise, we will likely see an uptick in the multiple to reach closer to 20x.
Where is the stock headed?
A slowdown in economic and industrial activities and expectations of a global recession, following the outbreak of coronavirus in 2020, led to an increase in 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 had dropped below $1,900/ounce toward the end of 2020, though they were still much above the pre-pandemic levels. 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 60% in 2020. The current crisis has so far helped WPM with better price realization for gold as well as silver. This was reflected in the 2020 results of the company where WPM revenues marked a y-o-y growth of 27%. Higher revenue was driven by healthy growth across all of its three segments – gold, silver, and palladium.
As the global economy opened up and lockdowns were lifted in phases, supply constraints eased, which led to expectations of 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 Israel. Faster economic growth projections had an adverse impact on gold prices which gradually fell to reach below $1,690/ounce in the beginning of April 2021. This also led to WPM stock falling from $56 to $42 over recent months. However, the recent spike in Covid cases has led to a modest rise in the gold price which is at $1,780/ounce at the end of April 2021 – an increase of almost $100/ounce in a month. Expectations of slower economic recovery than earlier projected (amidst the second Covid wave) and a low interest rate scenario will keep gold prices at an elevated level. This effect will be magnified by an increase in shipments which will drive healthy revenue and earnings growth in the coming quarters. Higher revenues and an elevated P/S multiple will drive the stock further. As per Trefis, WPM valuation works out to $55 per share. This reflects a potential upside of close to 30% from its current level.
While WPM stock may have moved a lot, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Compass Minerals vs Southwest Gas