Revealed: how much Shell, Diageo and British American Tobacco could be worth if they traded on multiples of US peers

The value of British American Tobacco could, in theory, more than double if it switched stock market listing to the US and traded on the same earnings multiple as Philip Morris.

Oil producer Shell moving its listing to the US could see its valuation increase by 28% if investors ascribed it the same rating as ExxonMobil. Furthermore, Johnnie Walker maker Diageo could be worth one third higher if it had a US stock listing and traded on the same earnings multiple as Jack Daniel’s owner Brown Forman.

These potential valuation uplifts highlight the sharp discounts that exist with UK stocks, even among companies that are household names and which you would expect to trade on premium ratings. It also explains why a growing number of UK-quoted companies have either moved or are weighing up the pros and cons of shifting their stock listing to the US.

This is despite the FTSE 100 having hit new record highs this week, helping to put the focus back on the UK market and doing so in a positive light.

Why are companies switching stock listing to the US?

Management teams are often under pressure from large shareholders to get their share price moving higher, particularly if the stock performance has been lacklustre.

Some in this situation dust off the acquisition playbook, believing a big deal can turbocharge their earnings growth and increase market share and therefore stock valuation. Others get the chopping board out, slashing jobs and paring everything back to the bone to improve profit margins, something that can also lead to a higher share valuation.

Sadly, history suggests transformational acquisitions rarely add value and trimming back can often lead to worn-out staff left to do the job of multiple people and be a counterproductive move. Therefore, moving to a different stock exchange could be a much simpler way of getting a higher valuation.

The US has a history of attributing much more generous valuations to stocks on its market, so is switching stock exchange a no-brainer exercise for UK-listed companies? Analysis by AJ Bell suggests not.

Source: AJ Bell, LSEG. Data as of 23 April 2024. PE ratio: latest share price to earnings, based on earnings estimates for next year to be reported

Moving a stock listing overseas has been a topic off and on in boardrooms for the past few years and recent chatter about Shell potentially defecting to the US has been the catalyst to put it back at the top of the agenda.

However, it’s not that straightforward. There are multiple reasons why UK stocks trade at a discount to their American peers. Some even trade at a premium, throwing cold water on the idea that switching listing from the UK to the US will equate to an automatic valuation uplift.

For example, construction equipment rental group Ashtead trades at a 25% premium to its US-listed rival, United Rentals. Gambling group Entain trades at a 32% premium to MGM Resorts, its partner in the US and the company which previously tried to acquire the UK-listed owner.

This analysis uses the price to earnings or PE ratio, a widely used valuation metric by investors to assess if a stock is cheap, fair value or expensive.

The healthcare sector is widely represented on the US stock market via pharmaceutical companies and medical equipment providers. For this reason, Smith & Nephew might be seen as a logical candidate to switch its listing to the US, particularly as its share price has been in a downwards trend since 2020 and shareholders would like a solution. However, comparison of various valuation metrics shows that it isn’t necessarily trading out of line with close peers.

Smith & Nephew trades on 20.4 times forecast earnings for 2024 which is only a small discount to Zimmer Biomet (PE: 23), a US medical device group which has marginally greater sales and a similar return on capital employed figure to its UK peer.

Smith & Nephew does trade at a significant discount to fellow industry player Stryker (PE: 33), yet that business generates significantly greater returns on the money invested in the business and more than seven times the amount of net profit. Arguably, that status deserves a premium rating.

Why Shell and BP are cheaper than large US-listed oil producers

Shell trades on 8.8 times forecast earnings for 2024. BP is slightly cheaper as it trades on 7.6 times earnings. However, both are miles cheaper than three big US-listed peers, Chevron (PE: 11.9), ExxonMobil (PE: 12.9) and ConocoPhillips (PE: 14.3).

They are also cheaper when using other valuation metrics than the PE ratio. The price to net asset value metric compares a company’s current market value to the value of its assets minus liabilities. BP trades on a ratio of 1.4 and Shell on 1.2 versus 1.8 from Chevron, 2.0 for ExxonMobil and 2.9 for ConocoPhillips. However, the UK-listed stocks compensate shareholders by offering a greater dividend yield (BP 4.8%, Shell 4%) versus two of the US peers (ExxonMobil 3.2%, ConocoPhillips 2%).

Part of the reason behind the discount with Shell and BP lies with corporate strategy and changing the stock listing to the US might not resolve the matter. The UK firms are undertaking a shift towards renewable energy and are no longer chasing big projects in oil and gas. They’re getting the most out of what they already own in fossil fuels while also spending big on areas like wind and solar power, whereas the US firms have been completely open in their desire to keep looking for more sources of oil and gas.

Any investment in the energy transition from big US oil producers tends to be in areas that are complementary to their skillset like carbon capture. In essence, US producers have been afforded higher valuations because they are sticking to their knitting and continuing to exploit fossil fuels. They are also doing so at a time when commodity prices are relatively high.

Shell and BP can’t backtrack on previous pledges to go green as it would cause a political backlash, but they can slow down the pace of their transition – which is already happening.

Why stocks in the same sector trade on different valuations

Comparing stocks based on the PE ratio can be instructive but it is not perfect. You need to consider sales and profits and how much they are growing by; different business mixes; asset quality; geopolitical risks (i.e., where do they operate?); financial stability (does the company have lots of debt?); returns on the money spent on the business; sales contracts (do they sell at market price or a fixed price?), and lots more.

There are also potential pitfalls to consider, including trustworthiness of earnings estimates, whether there are different accounting standards, tax and regulatory regimes, and so on.

Stock analysis can be hard work and it’s wrong to say that all companies of similar industry and size should be valued equally.

What’s the conclusion? Switching stock listing to the US is not a magic move that will suddenly make a company’s valuation sparkle.

It’s also worth noting that the S&P 500 index in the US now accounts for approximately 60% of the FTSE All-World index. The last time it reached that level was late 2001, just before the S&P 500 experienced a sharp downturn that lasted for most of 2002. Management chasing the American dream need to be careful what they wish for.

Has switching listing to the US made a difference?

CRH announced plans on 2 March 2023 to switch its main stock listing to the US. Its share price has subsequently risen by approximately 60%, delivering a superior return for shareholders. Investors have clearly been excited about the prospect of CRH potentially being valued on a higher rating, yet the bulk of the gains have simply come from improvements to its earnings profile.

According to Stockopedia data, the consensus forecast for CRH’s 2024 earnings has been upgraded by 39% since the US listing announcement.

The shares traded on 13.2 times 12-month forward earnings on the eve of the US listing announcement. They have since hit a peak PE ratio of 15.9-times, according to LSEG data, but have recently slipped back to 14-times.

Prime candidates to consider a US listing

In addition to Shell, British American Tobacco, Diageo and Smith & Nephew discussed earlier on, there are other obvious FTSE 100 stocks where there might be an argument in favour of switching listing to the US.

Experian derives two-thirds of its sales from North America compared to just 12% from the UK and Ireland. Four out of five of its biggest shareholders are US companies and North America is one of the credit agency’s most important regions for growth.

One of the key questions to ask is whether a US listing would make a difference to its valuation. Experian already trades on a premium rating of 25.1 times forward earnings. However, that is still an 8% discount to New York-listed Equifax, a key competitor. On this basis, one might argue it doesn’t seem worth the bother to switch listing.

Bunzl does a lot of business in the US and last year chief executive Frank van Zanten was quoted as saying, ‘We’re monitoring closely what’s happening’ in regard to UK stocks switching listing to the States.

The distributor’s shares trade on 16.2 times forward earnings. This doesn’t look particularly cheap for the UK market in the context of what the business does, but it might be afforded a higher valuation in the US given its track record of finding acquisitions that add value.