Shell’s (LSE: SHEL) share price has slipped recently, but this only exacerbates the deep discount to its true value, in my view.
The oil and gas supermajor continues to generate huge free cash flow, run disciplined capital spending, and return billions to shareholders through buybacks and dividends.
In short, it looks to have cracking potential gains in view — but how much exactly?
How does it compare to its competitors?
Comparing one stock’s key valuation measures with its peers gives a broad context for establishing where it ‘should’ trade.
In Shell’s case, its 13.1 price-to-earnings ratio is bottom of its peer group, which averages 24.2. These firms include Saudi Aramco at 17.1, ConocoPhillips at 19.9, ExxonMobil at 25, and Chevron at 34.1. So it looks extremely cheap on this basis.
The same applies to its 0.9 price-to-sales ratio against a peer average of 2.6 — again, bottom of the group. And it is the same story for Shell’s 1.4 price-to-book ratio compared to the 2.8 average of its competitors.
So, what’s its true value?
True value (or ‘fair value’) is an underlying business’s worth over the long-term, expressed as a price per share. It is crucial for the maximisation of the profits of long-term investors because share prices tend to trade to this fair value over time.
Discounted cash flow (DCF) analysis remains one of the clearest ways to estimate any stock’s fair value. It does this by projecting future cash flows and discounting them back to today to give a per-share price.
The less certain those forecasts are, the higher the return investors demand — and the heavier the discount becomes. The level of this discount can vary among analysts, producing different fair value outcomes. But using my own assumptions — including a 7.4% discount rate — Shell shares screen as 56% undervalued at their present £32.40 price.
That points to a fair value of £73.64 — more than double the current price. Consequently, if markets continue drifting towards fair value over time, this could be a superb potential buying opportunity if those DCF assumptions prove accurate.
What’s the engine for these gains?
Any company’s share price is driven by consistent increases in annual profits over time.
A risk here for Shell is a long-term bearish trend in oil and liquefied natural gas prices. That could feed through to lower cash generation. Another is supply-chain product inflation that could increase project and operating costs across its upstream and transition businesses.
Nevertheless, analysts forecast Shell’s earnings per share will increase by an annual average of 8.6% to end-2028 at least. This looks a significant underestimate to me, as its Q1 2926 adjusted earnings surged 112% quarter on quarter to $6.9bn (£5.1bn).
That reflected a powerful rebound across the portfolio, which was further reflected in a 110% jump in cash flow from operations (ex‑working capital) to $17.2bn.
My investment view
These strong underlying earnings drivers and the deep discount to fair value prompt me to buy more of the shares as soon as possible.
I also have my eye on other deeply undervalued stocks in other sectors, some offering very high dividend yields too.
Should you invest £5,000 in Shell Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Shell Plc made the list?
Simon Watkins owns shares in Shell.
