Royal Dutch Shell PLC Stock Is Skyrocketing - Is It Too Hot to Handle?

One of Wall Street's biggest winners of the day is Royal Dutch Shell PLC, a oil & gas integrated company whose shares have climbed 5.6% to a price of $56.29 -- 16.53% below its average analyst target price of $67.44.

The average analyst rating for the stock is buy. SHEL outperformed the S&P 500 index by 6.0% during today's afternoon session, and by 29.0% over the last year with a return of 12.4%.

Shell plc operates as an energy and petrochemical company Europe, Asia, Oceania, Africa, the United States, and Rest of the Americas. The company is an energy company. As investments, energy companies may display higher than average volatility because the price and availability of basic materials needed for production is dependent on geopolitical events. The shift towards renewable forms of energy may lessen this dependency, but is far from complete and may involve new risks of its own.

Royal Dutch Shell's trailing 12 month P/E ratio is 6.0, based on its trailing Eps of $9.44. The company has a forward P/E ratio of 5.4 according to its forward Eps of $10.49 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US energy companies is 9.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Shell's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.68. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing SHEL's growth potential .

To gauge the health of Shell's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.

SHEL's gross profit margins have averaged 20.5% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are steadily increasing based on their four year average gross profit growth rate of 11.7%.

Shell's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

  • 2021 free cash flow: $26,104,000,000.00
  • 2020 free cash flow: $17,520,000,000.00
  • 2019 free cash flow: $19,207,000,000.00
  • 2018 free cash flow: $30,074,000,000.00
  • Average free cash flow: $23,226,250,000.00
  • Average free cash flown growth rate: 1.4 %
  • Coefficient of variability (lower numbers indicating more stability): 25.3 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in SHEL have received an annualized dividend yield of 1.8% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Shell has a P/B ratio of 1.1. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Energy sector, which stood at 1.45 as of the third quarter of 2022.

Royal Dutch Shell is by most measures undervalued because it has a very low P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with a flat trend. The stock has strong growth indicators because it has a a PEG ratio of less than 1 and consistently average gross margins that are increasing. We hope you enjoyed this overview of SHEL's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.