When weighing up a potential investment, we always need to look forward rather than backwards. If you buy a stake in a business, it’s the future profits that count — and the stock market will value your shares based on future expectations.
With that in mind, it can be helpful to review what expert City analysts are expecting a company to earn in the coming years. These expectations can be compared to the share price, to give you a better idea of how the stock market is valuing the business.
Today I’m looking at the earnings per share (EPS) forecasts for BHP Billiton (LSE: BLT) (NYSE: BBL.US), the FTSE 100 resource giant. All my figures are courtesy of S&P Capital IQ.
Analysts expect BHP Billiton’s profits to be £1.62 per share in the coming year. This estimate means that, compared to today’s share price of 1,693p, the market is valuing BHP’s shares on a forward price-to-earnings multiple of 10.5.
Looking ahead, the consensus then calls for BHP Billiton’s earnings to return to £1.89 per share for 2015 before climbing to £2.01 in 2016. The data also indicates BHP’s revenues might be roughly flat same time period, between £47bn and £50bn.
The current valuation seems to reflect the market’s prevailing pessimism toward the mining and resources sector. But are investors correct to discount the generally challenging economics of BHP’s business, or has the gloom gone too far for global resource demand?
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> Mark does not own any shares in this article.
