Today Im looking at whether you should buy into Royal Dutch Shell (LSE: RDSB)and Sports Direct (LSE: SPD).
A streamlined major?
Royal Dutch Shell is going through a period of significant change. Shelltook advantage of the current oil price slump and paid a whopping $53bn for BG Group last year. While many think it was a great deal it has meant Shell is carrying too much debt and too many assets. CEO Ben van Beurden has decided that this is the right time to reshape Shell into a focused and streamlined integrated oil and gas company.
The company has set some pretty tough targets for itself over the next few years thatI think will drive the company forward. Van Beurden said in a recent presentation that Shell will be investing in compelling projects, driving down costs and selling non-core positionsthis is in order to reshape Shell into a more focused and more resilient company.
Shell will be investing in only the highest quality assets like its deepwater fields offshore Brazil and divesting around $35bn of assets before 2020. These steps should increase the free cash flow and reduce gearing to a more acceptable level for a major oil company.If van Beurden manages to hit these targets then Shell wont be trading around the 20 mark and could be much closer to 30.
Public criticism
Mike Ashleys Sports Direct has been in the press for all the wrong reasons this year. Criticism of zero hours contractsand a rumoured shareholder revolt has kept downward pressure on the stock. This along with a huge earnings miss means that shares are down 62% since 1 January this year.Earnings are expected to tick up around 5% next year which means the shares are trading on a forward price-to-earnings ratio of under 11 for 2017 and 2018. Broker targets for the company are around the 300p mark, which would suggest the company is trading at fair value.
The management team isattempting to improve the companys imageand a recent company investor presentation was titled Time For Change. Ashley has failed to restore investor confidence in the last few months, whichis putting an immense amount of pressure on the share price.Although the company faces increasing public criticism and has missed earnings this year, I believe the business model still works and that Sports Direct can become a darling of the London market once more.
These stocks were once twoof the most popular stockson the market but have been fallingfor a while now. I believe Shell is a good long-term investment and I think that it has considerable scope for upside in the next few years. In the case of Sports Direct Im not as optimisticbutI do think the shares are also undervalued. However, theres still scopefor a further fall in the share price and I would stay on the sidelines until the future is more clear.
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Jack Dingwall has shares in Royal Dutch Shell. The Motley Fool UK has recommended Royal Dutch Shell B and Sports Direct International. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
