LONDON -- When weighing up 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.
Today I'm looking at the earnings per share (EPS) forecasts for Shell (RDSB) (RDS.B), the FTSE 100 oil giant. All my figures are courtesy of S&P Capital IQ.
Analysts expect Shell to earn £2.74 per share in 2013. Compared to today's share price of 2,321 pence, the market is valuing Shell's shares on a forward price-to-earnings multiple of 8.5.
The estimates suggest earnings may climb to £2.82 per share for 2014 and then inch higher to £2.84 per share in 2015.
However, analyst consensus expectations for Shell's long-term profits are generally flat compared to its current level, with some experts suggesting EPS may be as low as £2.49 in 2017.
The data from S&P Capital IQ indicates Shell's revenues could decline 2% annually in the coming years, from £467 billion in 2012 to £443 billion by 2015.
These muted growth expectations reflect the difficulty for a company of Shell's size to expand, and the highly capital-intensive economics of the oil and gas industry. But on such an underwhelming valuation, is the market failing to appreciate the oil giant's well-covered 5% dividend yield and entrenched market position?
Whether these projections and the current valuation make the shares of Shell "fairly priced" is for you to decide.
However, one legendary U.K. investor who isn't tempted by the London-listed oil giants is super-investor Neil Woodford. In 2009 he famously sold his position in Shell, citing the difficulty for oil companies to replace their existing oil and gas reserves.
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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