LONDON -- When weighing a potential investment, it's useful 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 GSK to earn 97 pence per share in 2013. Compared to today's share price of 1,720 pence, the market is valuing Glaxo's shares on a forward price-to-earnings multiple of 18.
The estimates suggest earnings may rise to 97 pence per share for 2014 and then climb to 1.14 pounds per share in 2015, growing at an annualized rate of around 9% in the coming years.
The data from S&P Capital IQ also indicates GSK's revenues could climb 3% annually, from around 26 billion pounds in 2012 to 31 billion pounds by 2017.
These optimistic growth assumptions explain why GlaxoSmithKline is priced so generously by the market. But can the pharmaceutical giant live up to these lofty expectations?
Whether these projections and the current valuation make the shares of GlaxoSmithKline "fairly priced" is for you to decide.
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