Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.
Today I’m looking at Royal Dutch Shell Plc (LSE: RDSB) (NYSE: RDS-B.US) to ascertain if its share price has the potential to push higher.
Current market sentiment
The best place to start assessing whether or not Shell’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.
At present, the market appears to be excited about Shell’s future, as investors, buoyed by the Shell’s first quarter results, have pushed the company’s share price to an all-time high.
And it seems as if investors have every reason to be excited about Shell’s prospects. Indeed, during the first quarter of this year, Shell’s cash flow jumped to $14bn, up 21% from a year earlier and the company hiked its first quarter dividend payout by 4% to 28p.
That being said, Shell did report that oil and gas production had fallen by 4% for the quarter, although this was offset by new, higher-margin production from the Gulf of Mexico and Iraq, which helped to boost cash flow.
Upcoming catalysts
Nevertheless, despite Shell’s good set of first quarter results, the company is still trying to improve both earnings growth and shareholder returns.
In particular, Shell’s management is focused on three priorities — better financial performance, enhanced capital efficiency (which includes more selectivity on project choices and $15 billion of divestment in 2014-15), and strong project delivery.
In English, this means that Shell is looking to boost profit margins and reduce spending on projects with low returns, instead favouring projects with high returns and wide profit margins.
The execution of this plan is likely to be the company’s main catalyst going forward, as while Shell’s first quarter results show some progress, a lot remains to be done. Unfortunately, Shell’s growth plan will take time, but results should start to filter through over the next year or so, as the company divests under-performing assets.
Valuation
After the recent set of upbeat results and the following rally, Shell now trades at a forward P/E of around 12, which is slightly expensive compared to the company’s historic average P/E of 9.5. What’s more, Shell is now trading at a similar valuation to that reported during 2007, just before the financial crisis took hold.
Moreover, Shell’s management has stated that the oil and gas industry is going through a period of volatility. So, it is likely that Shell could end up missing City earnings forecasts for this year, which would hit the company’s valuation and share price.
However, the dividend yield of 4.5% is attractive.
Foolish summary
Overall, Shell’s recovery is attractive, but the company’s high valuation is concerning and for that reason I feel that Shell is overvalued at current levels.
