The stock of Shell Midstream Partners LP (NYSE:SHLX, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $15.56 per share and the market cap of $6.1 billion, Shell Midstream Partners LP stock appears to be significantly overvalued. GF Value for Shell Midstream Partners LP is shown in the chart below.
Because Shell Midstream Partners LP is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 2.20% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Shell Midstream Partners LP has a cash-to-debt ratio of 0.12, which is worse than 72% of the companies in Oil & Gas industry. The overall financial strength of Shell Midstream Partners LP is 3 out of 10, which indicates that the financial strength of Shell Midstream Partners LP is poor. This is the debt and cash of Shell Midstream Partners LP over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Shell Midstream Partners LP has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $499 million and earnings of $1.28 a share. Its operating margin is 38.28%, which ranks better than 91% of the companies in Oil & Gas industry. Overall, the profitability of Shell Midstream Partners LP is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Shell Midstream Partners LP over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Shell Midstream Partners LP is -22.2%, which ranks worse than 83% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -11.8%, which ranks in the middle range of the companies in Oil & Gas industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Shell Midstream Partners LP's return on invested capital is 9.90, and its cost of capital is 9.71. The historical ROIC vs WACC comparison of Shell Midstream Partners LP is shown below:
Overall, The stock of Shell Midstream Partners LP (NYSE:SHLX, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about Shell Midstream Partners LP stock, you can check out its 30-year Financials here.
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