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LONDON -- When weighing up a potential investment, we 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.
Analysts expect Lloyds' profits to be 5 pence per share this year. This means that compared to today's share price of 61 pence, the market is valuing Lloyds' shares on a forward price-to-earnings multiple of 12.
As ever with the U.K. state-backed banks, though, the expert forecasts range wildly. Different analysts expect Lloyds' earnings per share to be anywhere between 4 pence and 7 pence this year, reflecting the unpredictable nature of the bank's profits.
Looking ahead, the consensus calls for an improvement in Lloyds' earnings to 6 pence per share for 2014, and then 7 pence in 2015. However, the data suggests Lloyds' revenues may be flat over the same period at just over £18 billion.
An argument could easily be made that Lloyds is attractively priced at only 12 times its expected earnings, with even greater potential for growth as the banking sector recovers. But is it really possible to conservatively value Lloyds when its earning power is so difficult to estimate, and its balance sheet remains a mystery to even the smartest experts?
Whether these projections and the current valuation make the shares of Lloyds "fairly priced" is for you to decide.
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