In the last few weeks, the drumbeat of companies complaining about the lowly valuation of their shares and floating the idea of moving to the US market has grown steadily louder.

First there was miner Glencore (GLEN), then oil major Shell (SHEL) started making noises and most recently online retailer Ocado (OCDO) has come under shareholder pressure to move its listing.

What is significant is these aren’t diddy AIM-listed businesses who are contemplating throwing in the towel (although plenty are) – all three are FTSE 100 companies, and if any or all of them decide to move their main listing to the US then a whole swathe of companies could follow suit.

The question is, why are they so keen to move to the US and what good will it do shareholders?

POTENTIAL LEAVERS

Last year, mining group Glencore acquired a majority stake in a coal business previously owned by Canadian firm Teck Resources (TECK.B:TSE) with the aim of combining it with its own coal operations and listing the business in New York.

The rationale for listing there rather than here is US investors are more open to investing in fossil fuels than investors in Europe, where around half of mutual funds don’t own coal assets due to their ESG (environmental, social and governance) guidelines.

However, some shareholders are seen opposing listing the business in the US, in which case the company might consider moving its main listing to the US in order to benefit from the higher rating afforded to commodity stocks, according to analysts.

Irish cement group CRH (CRH) shifted its primary quote from London to New York last year on the basis the US is a huge market for its products, and investors have been richly rewarded with a 60% rally in the shares helped by strong earnings upgrades.

In 2022, mining group BHP (BHP) switched its primary listing from London to Sydney given most of the trading in its shares already happened in Australia.

Meanwhile, both the current and former chief executives of oil giant Shell, the largest company in the FTSE 100 by market cap, have talked about the advantages of moving the firm’s main listing to the US.

In an interview with Bloomberg, chief executive Wael Sawan pinned the valuation gap between his firm and US-listed rivals Exxon Mobil (XOM:NYSE), ConocoPhillips (COP:NYSE) and Chevron (CVX:NYSE) on the fact Shell has ‘a location that clearly seems to be undervalued’.

Sawan’s priority for now is to improve returns over what he calls a ‘sprint’ of 10 quarters, buying back shares in the meantime, but ‘if we work through the sprint and we are doing what we are doing, and we still don’t see that the gap is closing, we have to look at all options’, he admits.

Former chief executive Ben van Beurden is more forthright, describing Shell as ‘massively undervalued’ due to its London listing.

In an interview with the Financial Times, van Beurden pointed to the fact US companies benefit from deeper pools of capital and enjoy higher valuations thanks to ‘more positive’ attitudes from US investors.

‘These factors conspire against companies listed in Europe. I think increasingly that will be a problem, something will have to give,’ added the former chief executive.

Javier Blas, Bloomberg’s energy and commodities analyst, believes the risk for London of companies moving their primary listings is ‘far higher than the market – and exchange officials – perceive’.

He adds: ‘I expect the gap to persist simply because there are fewer buyers of oil stocks in Europe than in the US. Companies should list their shares where investors welcome them, and where they are properly valued – neither of which is currently true for fossil-fuel firms and the UK.’

MIND THE GAP

One way to value companies, favoured by Shell boss Sawan, is using free cash flow yield, or dividing the free cash flow per share by the stock price, so the higher the yield the cheaper the company.

On that basis, Shell trades on a yield of more than 12% and BP has a yield of almost 16% whereas Chevron and Exxon both trade on less than a 7% yield.

Using an even simpler measure of value, the PE or price-to-earnings ratio, there also seems to be a gap between the US companies and the two big UK-listed firms.

BP and Shell trade on 12-month forward PEs of 7.7 and 8.9 respectively, whereas the US trio of Chevron, ConocoPhillips and Exxon Mobil all trade on PEs of over 12 at current prices.

As oil prices and therefore energy company profits can be both cyclical and volatile, it helps to know what the cyclically-adjusted earnings trend looks like.

Smoothing out the peaks and troughs tells us what the underlying growth rate is for a company, as well as how volatile earnings are around their trend, and what the market typically pays for the shares based on the first two factors.

Using LSEG data going right the way back to 1987, we estimate BP and Shell have grown their earnings by an average of just over 4% and just over 5% per year respectively, albeit with significant peaks and troughs.

By comparison, Exxon Mobil has grown its earnings by just over 6% on average since 1987 while Chevron and ConocoPhillips have compounded earnings at more than 8% per year on average, all with a similar level of volatility to the UK duo.

What this suggests is the US energy companies are valued more highly than their UK peers because they grow their earnings at a faster rate, and when we look at the price-to-trend-earnings multiples that is exactly the case.

Using current prices, BP and Shell trade on 9.3 and 10.4 times trend earnings while the US firms trade on 13.4 to 14 times trend earnings.

Which raises the question, can simply moving its primary listing to the US improve a company’s stock market rating or does the answer lie in companies doing more themselves to raise their growth rates and improve their valuations?

IT’S ALL ABOUT GROWTH

There is a danger that UK companies – and to an extent UK investors – are guilty of crying wolf when they complain about the gulf in valuations between what seem to be similar businesses listed here and in New York.

Take pest control and hygiene firm Rentokil Initial (RTO), which generates a substantial proportion of its revenues in the US and trades on a forward PE of 27 times, which is far from cheap.

Yet Rentokil’s US rival Rollins (ROL:NYSE) is currently trading on 43 times this year’s earnings, so why the premium?

On the face of it both firms do the same thing, but a look at the long-term earnings of Rentokil and Rollins paints a very different picture – Rentokil has barely grown its earnings in the past 20 years, whereas Rollins has compounded earnings at more than 13% per year with very low volatility over two decades.

If a company has a high growth rate and good visibility over the trajectory of future earnings, why wouldn’t investors pay up? In contrast, we are left scratching our heads over the valuation of Rentokil.

Tool-hire firm Ashtead (AHT), one of the best-performing UK stocks of the last decade, generates the great majority of its sales and earnings in the US and therefore could be considered a prime candidate to move its listing.

The shares trade on a forward-looking PE of 19.7 times, whereas shares in its US-listed arch-rival United Rentals (URI:NYSE) trade on just over 16 times this year’s earnings.

The pat explanation would be that Ashtead grows its earnings faster than United Rentals, but in fact that isn’t the case – United Rentals has grown its earnings since 1998 at a mind-blowing rate of almost 24% per year compared with a still-impressive but not-even-in-the-same-ballpark rate of around 15% for Ashtead.

So, moving its listing to the US would be unlikely to generate a major uplift in Ashtead’s valuation, in fact it might even lead to a de-rating given there is a direct competitor with a better growth record on a lower rating.

In other words, while there may indeed be a general valuation disparity between the US and the UK, typically the reason for this at a micro level is US many companies tend to grow faster than their UK counterparts and therefore they deserve a higher rating.

If UK companies really want to do something about the valuation of their shares, they need to start looking closer to home and not assuming that decamping to the US will automatically lead to a re-rating.

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