Wheaton Precious Metals Corp.’s (TSE:WPM) price-to-earnings (or “P/E”) ratio of 39.6x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 12x and even P/E’s below 5x are quite common. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s so lofty.
With earnings that are retreating more than the market’s of late, Wheaton Precious Metals has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
Check out our latest analysis for Wheaton Precious Metals
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Is There Enough Growth For Wheaton Precious Metals?
The only time you’d be truly comfortable seeing a P/E as steep as Wheaton Precious Metals’ is when the company’s growth is on track to outshine the market decidedly.
Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 33%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% overall rise in EPS. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been mostly respectable for the company.
Looking ahead now, EPS is anticipated to climb by 2.0% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 7.0% each year, which is noticeably more attractive.
With this information, we find it concerning that Wheaton Precious Metals is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not so confident this will happen. There’s a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Wheaton Precious Metals’ P/E?
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Wheaton Precious Metals’ analyst forecasts revealed that its inferior earnings outlook isn’t impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren’t likely to support such positive sentiment for long. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
The company’s balance sheet is another key area for risk analysis. Our free balance sheet analysis for Wheaton Precious Metals with six simple checks will allow you to discover any risks that could be an issue.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
Valuation is complex, but we’re helping make it simple.
Find out whether Wheaton Precious Metals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.