Shell’s (LSE) share price is down 5% from its 13 May 12-month traded high of £29.56. This was in line with the fall of the FTSE 100 following the worse-than-expected US jobs data on 2 August.
In all the market chaos, the oil giant’s Q2 2024 results appear to have been overlooked. On several key measures, these were much higher than in the same period last year.
And even before they were released, the stock looked a bargain to me.
Undervalued?
Shell trades much lower than the average of its peers on the three main stock valuation measures I look at.
On the key price-to-earnings ratio (P/E) it trades at 12.2 against a competitor average of 14.2.
On the price-to-book ratio (P/B) it is at 1.2 against a 2.7 peer group average.
And on the price-to-sales ratio (P/S) it trades at just 0.7 against its peers’ average of 2.2.
So how much value is left in the stock right now? A discounted cash flow shows the shares to be 44% undervalued at their current price of £28.01.
What does that mean in cash terms? It means that a fair price for Shell’s shares should be £50.02.
They may go higher or lower than that, but it underlines to me how much value remains in the stock.
Strong earnings prospects?
There are risks in all companies, of course, and Shell is no different. One is a long-term reversal of the currently bullish trend in oil and gas prices. Another would be government pressure to speed up its energy transition programmes. These often require a lot of upfront investment ahead of any potential financial returns.
However, analysts forecast Shell’s earnings will grow 5.4% a year to end-2026. These are what drive share prices (and dividends) over time.
Expectations are also for earnings per share (EPS) to increase 9.4% a year to the same point. And return on equity is forecast to be 12.3% by that time.
These numbers look well supported by the firm’s Q2 2024 results, in my view. Adjusted earnings in the quarter were up 24% over Q2 2023 to $6.293bn. This powered a 16% rise in adjusted EBITDA to £16.806bn, and a 12% rise in net income to £3.517bn.
EPS was up 20% over the period – to $0.55p from $0.46. And its profit margin increased to 4.7% from 4.2%.
Increasing shareholder benefits
Shell’s strong results enabled it to continue boosting its shareholder rewards.
A further $3.5bn share buyback programme will occur over the next three months. These tend to support share price gains. The same amount in buybacks was completed in Q1.
The firm also boosted its second interim dividend by 4% to 34.4 cents (27p) from 33.1c in Q2 2023. It had already increased its Q1 interim dividend by 19.7% — also to 34.4c, but from 28.75c.
Currently, the shares yield a healthy 3.6% a year. However, analysts forecast this will increase to 3.9%, 4.2% and 4.4% respectively in 2024, 2025 and 2026.
Overall, Shell shares look unmissable value to me. They appear extremely undervalued, pay a good yield that is projected to rise, and the core business seems set for strong growth ahead.
Consequently, I will be buying more of the stock very soon.
