For investors looking to balance the search for growth with prudence, the "Growth at a Reasonable Price" (GARP) strategy offers a solid middle ground. This method looks for companies showing strong and sustainable growth, but whose shares are not priced at high levels. It avoids the speculation of high-growth stocks while staying away from value traps, companies that are inexpensive for a cause. One practical method to use this strategy is through systematic screening, looking for stocks with good fundamental ratings in growth, profitability, and financial condition, while checking that the price is still acceptable. A recent screen using these ideas has pointed to Wheaton Precious Metals Corp (NYSE:WPM) as a candidate for more review.
A Base of Strong Financial Condition
Before looking at growth and value, the stability of a company's balance sheet is critical. A financially weak company can have its growth interrupted by cash shortages or high debt. Wheaton Precious Metals does very well in this basic area, receiving a high Health rating of 9 out of 10 from ChartMill's fundamental analysis. The company’s financial strength is shown by several important measures:
- Minimal Debt: With a Debt/Equity ratio of 0.00, WPM operates with almost no debt, a clear benefit in a capital-heavy industry.
- Strong Liquidity: A Current Ratio and Quick Ratio both at 8.09 show more than enough resources to meet short-term needs, giving a good buffer against operational changes.
- Solvency: An Altman-Z score of 114.37 suggests a very low short-term risk of financial trouble.
This excellent financial condition gives the company the ability to fund new streaming agreements, handle commodity price changes, and return capital to shareholders without the burden of balance sheet risk. For a GARP strategy, such strength means the company's growth potential is built on a secure base, not financial tactics.
Profitability: High Margins and Effective Capital Use
Profitability is what drives lasting growth. WPM’s business model, precious metals streaming, naturally creates high margins, as the company gives upfront capital to miners for the right to buy future production at low, set costs. This is seen in a high Profitability rating of 9. The fundamental report notes outstanding margins that do better than most of its competitors in the Metals & Mining industry:
- Profit Margin: 54.72%
- Operating Margin: 63.50%
- Gross Margin: 68.59%
Also, the company shows effective use of capital. Its Return on Invested Capital (ROIC) of 12.78% is better than 85% of industry competitors and has improved from its three-year average. Strong, increasing profitability is a central idea of affordable growth investing, as it indicates the company can turn revenue gains into even higher earnings.
Showing and Providing Growth
The "Growth" in GARP is essential, and WPM provides with a Growth rating of 8. The company has shown strong recent results and is set for more expansion.
- Past Performance: Over the last year, WPM increased its Earnings Per Share (EPS) by 61.01% and Revenue by 50.33%. The long-term record is also good, with an average yearly EPS growth of 21.22% over recent years.
- Future Expectations: Analysts expect this trend to continue, with estimated yearly EPS growth of 15.55% and Revenue growth of 14.31% in the next few years. Importantly, the revenue growth rate is predicted to rise compared to its past speed.
This mix of strong past delivery and a positive future path is what growth-focused investors look for. It shows the company is successfully following its plan and growing its business.
Valuation in Perspective
Valuation is where the "Reasonable Price" part becomes clear. WPM’s Valuation rating is a 5, which, within this screen, shows it is not highly priced. A quick look at standard measures might cause concern:
- The Price/Earnings (P/E) ratio of 60.42 is high on its own and compared to the wider S&P 500.
- The Forward P/E of 40.99 is closer to its industry average.
However, valuation cannot be seen alone. The point for GARP investors is to judge if the price is fair for the quality and growth available. Here, several points balance the higher P/E:
- Growth Adjustment: The Price/Earnings to Growth (PEG) ratio, which changes the P/E for expected growth, is low, indicating the stock may be fairly valued when its growth outlook is considered.
- Quality Consideration: The company’s high profitability and excellent financial condition likely support a higher valuation, as they lower investment risk.
- Industry Comparison: Compared to its industry peers, WPM’s valuation on several measures, including Price/Free Cash Flow, is actually more favorable.
While not a low-price stock, WPM’s valuation seems acceptable when weighed against its better fundamentals and growth picture, meeting the main need of the affordable growth screen.
Conclusion
Wheaton Precious Metals Corp presents a solid example for the Growth at a Reasonable Price method. The company is not just growing; it is growing from a place of high strength, marked by industry-leading profitability, a very strong debt-free balance sheet, and high margins from its distinct streaming model. Its valuation, while high on a basic P/E basis, seems more acceptable when viewed alongside its growth path, financial quality, and position in its sector. For investors screening for companies that mix good growth with solid fundamentals and a fair valuation, WPM deserves more study.
Interested in finding more stocks that match this Affordable Growth description? You can use the same screen that found WPM and view other possible candidates here.
For a complete look at all fundamental factors, you can see the full Fundamental Analysis Report for WPM.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.
