Why Morgan Stanley thinks the Shell share price is a bargain

The Shell [RDSB.L] share price has caught the attention of analysts at Morgan Stanley. Analysts at the investment bank have included Shell in a list of European stock picks they believe are going “cheap”, which they rate as overweight. The stocks in the list are at the bottom of their 10-year range but are predicted to see a more than 20% upside.  

In the note, the analysts said that European markets would rally for the next 12-months and expect a “bigger bounce back” in earnings compared to the US. “Europe has the scope to enjoy a bigger bounce back in EPS over the next 12-18 months than many of its peers, especially the US given the potential for a corporate tax hike in 2022,” the analysts said.

In financials, the bank sees BNP Paribas [BNP.PA], Société Générale [GLE.PA], Banco Santander [SAN.MC] and ING [ING] as cheap. In energy, it highlighted Shell and ENI, while in media, it selected Auto Trader Group [AUTO] and ITV [ITV.L]. Stocks including Acerinox [ACX.MC] and SSAB [SSAB-A.ST] are predicted to see a more than 20% upside.

We pick out three of the stocks featured that could provide some stability at a time of volatility in the wider equity markets.

Can the Shell share price benefit from EVs?

Shell’s share price has gained 9% over the past three months (through 21 September). However, the energy major’s stock has sunk more than 28% over the decade. In comparison, the FTSE 100 has gained over 34% in the past ten years. 

Shell’s share price is closely aligned to the price of oil. Yet, things are changing. The company is investing heavily in increasing its network of charging stations as it looks to take advantage of the shift to electric vehicles.

Analysts polled on Refinitiv have pinned an average 1,923.75p price target on the stock – hitting this would see a 29.5% upside on the 21 September close. For income-seeking investors, the stock carries a 3.74% forward yield.

Is the BNP Paribas share price undervalued based on earnings?

BNP Paribas’s [BNP.PA] share price is down almost 5% over the past three months, yet the underlying fundamentals at the bank look strong. In the second quarter, the bank reported a net income of €2.9bn, up 26% on the same period the previous year as its retail banking business rebounded following the pandemic.

The bank announced an extra dividend payout off the back of the results, and the stock carries a 4.97% forward yield. Adding to the argument that BNP Paribas’s share price is a steal is a trailing 8.28 price to earnings ratio. Analysts have a €62 price target on BNP Paribas’ share price, representing a 20.7% upside on the 21 September close.

Could rising demand for used cars make the Auto Trader share price a buy?

Auto Trader’s [AUTO.L] share price has skidded almost 2% over the past three months. Like the secondhand car marketplace’s customers, investors could be in for a bargain. For the fiscal year 2021, Auto Trader delivered an operating profit of £161.1m on an operating margin of 61%. While both figures are down year-on-year, these are strong numbers considering they encompass the height of the coronavirus pandemic.

According to the company’s annual report, Auto Trader enjoys more than 90% brand awareness with customers and gets more than 58 million cross platform visits each month.

Auto Trader also made HSBC’s ‘Bucket of ideas’ research note this month. In the list of 18 UK stocks, analysts at the bank said that the secondhand car website had “considerable scope to grow”, and new revenue would come from part-exchange and financing options.