Monday, March 27, 2017

Royal Dutch Shell $RDS Benjamin Graham valuation

The crash in oil prices from $80-$100 down to $50 a barrel which started at the end of 2014 has had an effect on Shell's value as well as its stock price. 

SECTOR: [PASS]  RDS.A is neither a technology nor financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. RDS.A's sales of €218,000 million, based on 2016 sales, pass this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. RDS.A's current ratio €72,000m/€70,000m of 1.2 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for RDS.A is €213,000 million, while the net
current assets are €12,000 millionRDS.A fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. RDS.A's EPS decline over that period fails the EPS growth test.

EARNINGS YIELD:  [FAIL] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. RDS.A's E/P of 3% (using last years earnings) fails this test.

Graham Number value:  [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. RDS.A has a Graham number of (15 x €2,4 EPS x 1,5 x €22 Book Value) = €20 and fails this test.

Dividend: 1,7/24 = 7% but the oil and gas prices have to increase for Shell to be able to keep paying this dividend.

Before the oil price crashed at the end of 2014, Royal Dutch Shell seemed cheap...

Comments, questions or E-mails welcome:

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