These Analysts Just Made A Massive Downgrade To Their Shell plc (LON:SHEL) EPS Forecasts

The analysts covering Shell plc (LON:SHEL) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for this year. Both revenue and earnings per share (EPS) forecasts went under the knife, suggesting the analysts have soured majorly on the business. Shares are up 4.7% to UK£21.24 in the past week. We'd be curious to see if the downgrade is enough to reverse investor sentiment on the business.

After this downgrade, Shell's 22 analysts are now forecasting revenues of US$397b in 2022. This would be a sizeable 37% improvement in sales compared to the last 12 months. Per-share earnings are expected to bounce 135% to US$6.91. Before this latest update, the analysts had been forecasting revenues of US$398b and earnings per share (EPS) of US$4.98 in 2022. Although the revenue estimates have not really changed, we can see there's been a considerable lift to earnings per share expectations, suggesting that the analystshave become more bullish after the latest consensus.

See our latest analysis for Shell

There's been no major changes to the consensus price target of US$33.49, suggesting that the improved earnings per share outlook is not enough to have a long-term positive impact on the stock's valuation. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. There are some variant perceptions on Shell, with the most bullish analyst valuing it at US$31.16 and the most bearish at US$20.30 per share. Analysts definitely have varying views on the business, but the spread of estimates is not wide enough in our view to suggest that extreme outcomes could await Shell shareholders.

These estimates are interesting, but it can be useful to paint some more broad strokes when seeing how forecasts compare, both to the Shell's past performance and to peers in the same industry. For example, we noticed that Shell's rate of growth is expected to accelerate meaningfully, with revenues forecast to exhibit 87% growth to the end of 2022 on an annualised basis. That is well above its historical decline of 6.8% a year over the past five years. Compare this against analyst estimates for the broader industry, which suggest that (in aggregate) industry revenues are expected to decline 5.5% per year. So although Shell is expected to return to growth, it's also expected to grow revenues during a time when the wider industry is estimated to see revenue decline.

The Bottom Line

The most important thing to take away from this upgrade is that analysts upgraded their earnings per share estimates for this year, expecting improving business conditions. On the plus side, analysts made no changes to their revenue estimates - and they expect sales to perform better than the wider market. We're also surprised to see that the price target went unchanged. Still, deteriorating business conditions (assuming accurate forecasts!) can be a leading indicator for the stock price, so we wouldn't blame investors for being more cautious on Shell after the downgrade.

With that said, the long-term trajectory of the company's earnings is a lot more important than next year. We have estimates - from multiple Shell analysts - going out to 2024, and you can see them free on our platform here.

Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are downgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.