Heading into the May jobs report, speculation ran hot that the Federal Reserve would consider shifting its monetary policy to one that is more accommodative or dovish. That would be good news for gold and silver (mostly gold) streaming specialist Wheaton Precious Metals (NYSE:WPM). After all, a dovish policy would imply lower interest rates, thus potentially accelerating the flow of money. That’s inflationary, and inflation is good for gold.
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Again, heading into the most recent labor market disclosure, investors had reason to be bullish. In the prior April jobs report, employers only added 175,000 jobs. That was well off the previous month’s tally of over 300,000. Also, the April figure slipped beneath economists’ consensus target of 240,000 jobs. That meant the economy wasn’t as strong, requiring Fed intervention.
Unfortunately (from a cynical perspective), the May jobs report was hot: 272,000 employment opportunities added, above the 165,000 projected. This framework translated, if anything, to the Fed possibly implementing a hawkish policy. Still, a deeper dive reveals mixed signals – and these mixed signals point to an optimistic argument. Therefore, I am bullish on WPM stock.
Inflation Still Not Out of the Cards for WPM Stock
Monetary policy and economic dynamics, combined with their implications for the gold market, present numerous complexities. Amid this messy canvas, it’s important to hold onto a simple point: inflation, as stated earlier, is good for gold. And inflation may still be in the cards, irrespective of whatever the Fed decides to do.
Yes, Fed Chair Jerome Powell held a press conference to discuss the resilience and strength of the U.S. economy. Nevertheless, to TipRanks reporter Paul Hoffman’s point, “Some investors, business people, and other Americans watching probably felt that the economy is experiencing more trouble than the data suggests. This is because there is a mixed view between economic indicators and public sentiment.”
What are these mixed signals? A key issue is the unbalanced nature of the May jobs report. “While the overall unemployment rate remains low at 4.0%, unemployment among 20-to-24-year-olds rose to 7.9%, up from 6.3% a year earlier. Additionally, job openings fell to their lowest level in over three years. These inconsistencies highlight that there are uneven pockets of weakness across different demographics,” wrote Hoffman.
Further, the market expert calls out the disparity between higher and lower-income households. Hoffman wrote, “Lower-income individuals, who spend a larger portion of their income on necessities, feel the pinch of rising prices more sharply and are less confident about their job prospects. They are struggling to cover the much higher-priced necessities. Meanwhile, wealthier households with more disposable income continue to shell out for things they want.”
In other words, wealthier households have been spending irrespective of pricing pressures. At the same time, the high unemployment rate of young people needs to be addressed. That’s where a more accommodative monetary policy would help.
Further, as much as the Fed probably doesn’t want to think about interest rate cuts after struggling mightily to achieve some form of disinflation, the problem is that borrowing costs can’t remain excessively high. At some point, enterprises would become more incentivized to save money rather than to spend it, explaining some of the mass layoffs we continue to see.
Valuation Looks Enticing for Wheaton Precious Metals
The beauty of WPM stock is that even if you don’t necessarily buy the fundamental bullish argument, the valuation story makes sense. Admittedly, at first glance, that statement sounds odd.
Right now, the market prices WPM stock at a trailing-year revenue multiple of 21.8x. Like the May jobs print, this metric is red hot. In sharp contrast, the gold sector runs a sales multiple of 2.8x. Who wants to pay a premium of 8x relative to the average gold enterprise?
However, what you must remember is this: Wheaton Precious Metals isn’t technically a gold miner. Instead, it specializes in the streaming business model. Rather than extract the metal itself, it provides upfront capital to mining enterprises. In exchange, Wheaton receives all or part of the metals produced. Because the terms are upfront, WPM enjoys superior pricing predictability at the expense of outright capital gains potential.
Understanding this business model, we can turn to gold mining market projections. BCC Research believes that between 2021 and 2026, the sector could expand at a compound annual growth rate (CAGR) of 3.1%. Zion Market Research broadcasted a similar expansion rate, a CAGR of 3.5% between 2023 and 2030.
On the flip side, consider analysts’ projections for Wheaton’s revenue. Experts believe that from Fiscal 2023’s sales result of $1.02 billion to the projected Fiscal 2028 tally of $1.42 billion, Wheaton’s sales could rise at a CAGR of 6.84%.
That’s based on the consensus. If we were to look at the high sales target for Fiscal 2028 ($1.6 billion), the CAGR would jump to 9.42%. With Wheaton forecasted to resoundingly beat its sector, thanks to its streaming business model, WPM stock seems to be a discounted buy, especially since it was running a sales multiple of nearly 24x in the fourth quarter last year.
Is WPM Stock a Buy, According to Analysts?
Turning to Wall Street, WPM stock has a Moderate Buy consensus rating based on eight Buys, two Holds, and zero Sell ratings. The average WPM stock price target is $62.47, implying 18.1% upside potential.
The Takeaway
Thanks to a better-than-expected May jobs report, the prospects of the Federal Reserve reducing interest rates seem slim. That wouldn’t be good news for Wheaton Precious Metals. However, a deeper dive in the latest print reveals mixed signals, particularly for young people who have seen their unemployment rate rise uncomfortably. In other words, an accommodative policy may still be needed. Amid this backdrop, WPM stock may also be relatively undervalued, given its upward forecasted trajectory relative to the underlying sector.
