LONDON -- When weighing up a potential investment, it's useful to look forward rather than backward. 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 Tesco to earn 33 pence per share this year. Compared to today's share price of 380 pence, the market is valuing Tesco's shares on a forward price-to-earnings multiple of 11.5.
However, analysts are far from agreed on this year's estimates, with different experts forecasting earnings per share ranging widely between 21 pence, and 38 pence.
The consensus then calls for an improvement in Tesco's earnings for 2015, with EPS estimates climbing to 35 pence. If these earnings were achieved, the company would have returned to the record per-share profits achieved between 2011 and 2012.
The data indicates Tesco's revenues could grow 4.5% annually in the next two years, from 64 billion pounds today to over 70 billion pounds by 2015.
These quietly optimistic expectations reflect both Tesco's modest valuation, and the market's confidence in the retailer's exceptional track record. But is the market failing to fully appreciate Tesco's rapidly growing international presence? Or is the supermarket giant past its best-before date?
Whether these projections and the current valuation make the shares of Tesco "fairly priced" is for you to decide.
However, one legendary U.K. investor who has fallen out of love with Tesco is super-investor Neil Woodford. In 2012, he famously sold his position in the retailing giant and, instead, bought the shares of one other British supermarket.
We've detailed Woodford's market-thrashing approach, and some of his current high-yielding stock picks in the exclusive Motley Fool report, "8 Shares Held by Britain's Super Investor."
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Mark Rogers does not own any shares in this article. The Motley Fool recommends and owns shares of Tesco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.