AG: First Majestic Silver vs. Wheaton Precious Metals: Which Stock is a Better Buy?

The pandemic has provided a significant tailwind to the precious metals industry, as prices of safe-haven assets like gold and silver have skyrocketed. The surge in prices of these precious metals can be attributed to multiple reasons. Primarily, the stock market remained disconnected from the real economy since the onset of the virus.

Many investors perceived the booming stock market, particularly the skyrocketing rally of technology stocks, amid a slowing economy, as a replication of the dot-com bubble in the 2000s. This, along with near-zero interest rates, and declining treasury yields shifted investors’ focus to precious metals. Silver prices have risen 33.5% year-to-date.

Mining companies have immensely benefited from this trend, as the demand for silver accelerated since the onset of the pandemic. Despite having their mining operations halted initially, companies such as First Majestic Silver Corp. (AG) and Wheaton Precious Metals Corp. (WPM) have been able to deliver impressive results in the last reported quarter.

Both AG and WPM have generated decent returns over the past year. While AG has gained 14.8% over this period, WPM returned 82.9%. However, in terms six-month’s performance, AG is the clear winner with a 42.5% gain versus WPM’s 15.6% return.

But which stock is a better buy now? Let’s find out.

Latest Movements

AG raised C$78 million through a bought deal investment of 500,000 shares to institutional investor Eric Sprott. In September, AG announced that it had acquired a 14.9% stake in Silver Dollar Resources, Inc. for $9.16 million. It currently has a 16.4% ownership stake in Silver Dollar Resources.

WPM began trading on the London Stock Exchange on October 28^th. This move should significantly increase the stock’s trading volume in the market, with the overall demand for silver growing.

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The company entered into a definitive precious metals purchase agreement with Caldas Gold Corp on November 5^th. Under this partnership, WPM is expected to buy 6.5% of the gold production and 100% of the silver production, up to a certain limit, excavated from Caldas’ Marmato Mine. With a projected higher inventory, this partnership should help WPM raise its revenues significantly.

Recent Financial Results

AG’s silver production rose 72% year-over-year to 3.20 million ounces, and gold production increased 63% year-over -year to 25,771 ounces in the third quarter that ended September 2020. Revenue increased 30% from the same period last year to $125.88 million, driven by a 28% year-over-year increase in average silver prices. Net earnings of $30.95 million and EPS of $0.14 reported for the quarter, indicates a substantial rise from the negative year-ago values.

WPM’s revenue grew 30.9% year-over-year to $247.95 million in the second quarter that ended June 2020. Gross margin increased 84.9% from the same period last year to $124.08 million. Net earnings and EPS of $105.81 million, and $0.24, respectively, reflect a significant rise from the negative values reported in the prior year quarter.

Past and Expected Financial Performance

WPM’s revenue and total assets grew at a CAGR of 2.2% and 0.8%, respectively, over the past three years. Analysts expect the company’s EPS to grow 106.2% in the current quarter that ended September 2020, 103.6% in the current year, and at a rate of 22.1% per annum over the next five years. The consensus revenue estimates indicate 30.2% growth in the current quarter, 29% in the current year, and 18.8% next year.

AG’s revenue and total assets increased at a CAGR of 4.6% and 6.9% respectively, over the past three years. Analysts expect the company’s EPS to rise 46.8% per annum over the next five years, and revenue to grow 29.4% next year.

Thus, WPM is at an advantageous position here.

Profitability

WPM’s trailing 12-month revenue is 3.02 times what AG generates. WPM is also more profitable with a gross margin of 72.6%, compared to AG’s 34%.

Furthermore, WPM’s ROE and ROA of 6.7% and 3.8%, respectively, compare favorably with AG’s negative values.

Valuation

In terms of forward GAAP P/E ratio, AG is currently trading at 60.47x, 42.6% more expensive than WPM, which is currently trading at 42.42x. However, WPM is more expensive in terms of trailing 12-month price/sales (23.23x versus 7.71x) and price/cash flow (36.66x versus 34.50x).

POWR Ratings

Both AG and WPM are rated “Neutral” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Ratings are graded on both these stocks:

WPM has a “C” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #3 out of 11 stocks in the Miners – Silver industry.

AG holds a “C” for Trade Grade, Buy & Hold Grade and Industry Rank, and “B” for Peer grade. It is currently ranked #6 in the same industry.

The Verdict

Both AG and WPM have delivered impressive financials over the last quarter, beating consensus estimates. However, as the global economy recovers from the pandemic, with industrial production resuming in the United States, focus is gradually shifting from precious metals.

With companies making a massive comeback from their March lows, investors are readily investing to maximize their capital gains with the belief that the worst is over. As investor sentiment slowly shifts, silver prices are expected to remain dormant at the current level, generating negligible returns to people entering the industry now. Hence, though WPM is a better choice, investing in any of these stocks might not be a wise decision right now.

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AG shares were trading at $11.96 per share on Friday afternoon, up $0.32 (+2.75%). Year-to-date, AG has declined -2.45%, versus a 10.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...