Standing out among the Street's worst performers today is Shell, a oil & gas drilling company whose shares slumped -4.0% to a price of $65.33, 21.58% below its average analyst target price of $83.3.
The average analyst rating for the stock is buy. SHEL lagged the S&P 500 index by -4.0% so far today and by -29.7% over the last year, returning 3.3%.
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.
Shell's trailing 12 month P/E ratio is 11.6, based on its trailing EPS of $5.64. The company has a forward P/E ratio of 7.8 according to its forward EPS of $8.41 -- which is an estimate of what its earnings will look like in the next quarter. As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US energy companies is 13.84, and the S&P 500 has an average of 28.21. 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.
To better understand SHEL’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Shell’s PEG is 2.05, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Shell's free cash flow, which was $13.51 Billion as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $42.92 Billion and they've been growing at an average rate of -18.7%. SHEL's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 2.0% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
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's P/B ratio is 2.23 -- in other words, the market value of the company exceeds its book value by a factor of more than 2, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 2.05 as of the second quarter of 2024.
Since it has a Very low P/E ratio, an average P/B ratio, and positive cash flows with a downwards trend, Shell is likely fairly valued at today's prices. The company has poor growth indicators because of a PEG ratio of less than 1 and weak net margins with a stable trend. We hope you enjoyed this overview of SHEL's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
